Alphatec Holdings, Inc. (ATEC) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Alphatec Spine Fourth Quarter and Fiscal Year-End 2011 Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. And now I will turn the conference over to Mark Francois, please begin.

Thank you for standing by ladies and gentlemen. I am Mark Francois, Senior Director of Investor Relations for Alphatec Spine. Thanks for joining us today for Alphatec Spine’s conference call to discuss our fourth quarter and fiscal year-end 2011 and financial and operating results. Speaking today will be Alphatec’s Chairman and Chief Executive Officer, Les Cross; Dirk Kuyper, President, Global Commercial Operations; and Michael O'Neill, Vice President and Chief Financial Officer. Also on the call is Ebun Garner, our General Counsel. As the operator said, the remarks today -- you’ll be in a listen-only mode. After those remarks have been concluded we will open up the call for your questions. The call will be recorded today, February 28, 2012, and a replay of this call will be available on our website for at least the next 30 days. Before I turn the call over to Dirk, I wanted to remind you that today's conference call contains forward-looking statement made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements relate to the company's operational initiatives, sales and marketing strategies, projections for the 2012 sales operating margins adjusted EBITDA growth, net earnings and economic and commercial market conditions. These forward-looking statements are based on the company's current expectations and are subject to a number of risks, uncertainties and assumptions that could cause the actual results to materially differ from those forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Many of these risks and uncertainties and assumptions are discussed in our 2010 Annual Report on Form 10-K for the year ended December 31, 2010, and on Form 10-Q for the quarter ended September 30, 2011, filed on March 4, 2011 and November 4, 2011 respectively with the Securities and Exchange Commission, as well as other filings on Form 10-Q and periodic filings on Form 8-K. Our SEC documents are readily available on our website and www.alphatecspine.com. And with that I will hand the call over to Dirk.

Thank you, Mark. Good afternoon everyone and welcome to Alphatec Spine’s fourth quarter and year-end 2011 conference call. Before we begin our comments on the fourth quarter results, I would like to bring your attention to a separate press release we issued moments before this earnings announcements. In an effort to strengthen Alphatec Spine’s business prospects in 2012, we have realigned the top leadership roles and Alphatec Spine. Effective immediately, I will focus my energy on global sales and marketing strategy, with a clear focus on revenue growth and will assume the role of President, Global Commercial Operations. Les, will assume the role of Chairman and Chief Executive Officer and will have responsibility for driving our initiatives related to global operating excellence. With the 2 of us focused on our respective areas, the realignment should strengthen Alphatec Spine’s ability to more effectively navigate a difficult spine market in 2012, as we seek to ensure that the company meets its profitability and cash flow goals for the year. We believe this should benefit shareholders as well. We believe that Alphatec Spine is well served by these changes and I am personally looking forward to working with Les as we continue to strengthen Alphatec Spine’s position in the spine market in 2012. Les, I will turn the call over to you.

Thanks, Dirk. Good day everyone, I can't tell you how excited I am about this new realignment. To really put it in simple terms, Dirk and I are taking a divide and conquer approach to unlocking the sizable stakeholder value that exists within Alphatec Spine. As Dirk said, he will focus on the commercial operations side of the company while I will focus on global operational excellence. In particular, innovation and a continuous flow of new products, improving our gross profit margin, leveraging our current cost structure, driving strong cash flows and delivering to our customers, worlds class customer experience. We are excited about this. We think it’s an exciting approach to a market that is going through change and a different way of approaching the market and our customers. I look forward to demonstrating the success of this structure to you on future calls. With that said, I would now like to turn the call back to Dirk to review the quarter and full year.

Great. Thank you, Les. So this afternoon I am going to provide highlights of our operating performance from the fourth quarter and full year 2011. I will then turn the call over to Mike, who will provide a more detailed review of our financial performance followed by our guidance for 2012. I will then come back with closing comments and will open the call up for your questions. The key messages from today's call are, continued solid revenue growth across most of our channels, a strong new product cycle starting to contribute to revenues. Our global distribution platform continues to expand into emerging markets. We generated $2 million in cash in the fourth quarter and the company was cash flow positive for the full year by $2.5 million before items that Mike will discuss in a moment. We are making initial progress streamlining our cost structure and increasing manufacturing efficiencies. In addition, we have engaged a corporate consulting partner to help expedite and maximize these efforts. We anticipate that 2012 will be Alphatec Spine’s best year yet. We have strengthened our leadership team and our focus is on continuing to drive revenue that outpace the growth of the overall market while meaningfully improving our profitability. Overall, we are pleased with our revenue growth for the fourth quarter and for the full year. In the fourth quarter we achieved revenues of $49.5 million which represents growth of approximately 7.6% over the fourth quarter of 2010, or 7% on a constant currency basis and near the high end of our quarterly performance in 2011. This is a solid result given the ongoing headwinds in the spine market. It was also a 4% increase sequentially over the third quarter of 2011. This is a testament to the strength of our organization that we continue to deliver above market growth under such challenging conditions. For the fourth quarter of 2011, U.S. revenues grew by 2% year-over-year and international revenues grew by 18.8% on a constant currency basis. While U.S. revenue growth was positive and outpaced a flat to down market, the rate growth was at the lower end of our historical performance in 2011, reflecting year-over-year market pressures. On a sequential basis in the U.S., we are seeing the pressures on pricing and volume moderate and we are hopeful that these market trends will continue. International sales benefited from strong performance in Japan. Our biologic business enjoyed strong growth in the fourth quarter and we continue to be very pleased with this performance, although it did have a modest impact on our gross profit margin as biologics typically carry lower margins then our other implants. Mike will cover the details of our gross margin later in the call. For the full year 2011 on a GAAP basis, we achieved revenues of $197.7 million, an increase of approximately 15.2% over the full year 2010. On a constant currency and pro forma basis, full year 2011 grew 5.8% over the full year 2010. For the full year 2011, on a pro forma basis, our U.S. business grew 8.9%, international business for the full year grew 6.3% but declined by 1% on a constant currency basis. Strong growth in Japan and Asia Pacific was offset by weaker sales in Europe, Middle East and Africa. In 2011, we made key appointments to our senior leadership team to strengthen our global business in operations, regulatory, quality and clinical marketing and human resources. And in late 2010, in finance. While the primary objective of the company remains driving global sales growth, we are also keenly focused on streamlining and strengthening our operating performance in 2012. We are not satisfied with our performance in this area in 2011 and we are actively assessing our current systems and effecting improvements. While we made progress in the past few months, we have a lot more to accomplish in this area. As we stated last quarter, we are focused on 3 key initiatives in 2012. Reducing our cost of goods sold and increasing efficiencies in our U.S. operations. Reducing cost to goods sold in our international operations and reducing SG&A expenses internationally, all of which we believe will enable us to achieve our long-term goal of 20% non-GAAP adjusted EBITDA margins. Over time, we expect these cost reduction programs to achieve annualized cost savings of approximately $2 million. We will provide more details around these initiatives on our first quarter conference call. We are also focused on reducing our global SG&A expenses. We have already discussed the efforts undertaken last August to reduce SG&A expenses in our U.S. operations and in the fourth quarter we started to see some benefit from that action. Overall SG&A expenses for the fourth quarter of 2011 were at their lowest level for the year and we are pleased with this progress. We have significant inventory write-offs in 2011, which amounted to $8.2 million. Throughout the integration and after upgrading our senior management team, we uncovered several issues related to inventory in Europe and the U.S., which resulted in these write-offs. Our expectation is that these are now behind us and we are putting in place measures that should ensure that we do not repeat this performance in 2012. To expedite our success in this area, we have enlisted the support of a corporate performance improvement consulting firm. They are experts at operational efficiency improvement and their support will help us more quickly define and strengthen our essential business processes. As we discussed, Alphatec Spine is in the midst of exciting new product cycle which we expect to have positive impact on our 2012 revenue, after the full market launches later this year. Our new products include a next generation Anterior Cervical Plate, Trestle Luxe; our Avalon Occipito-Cervico Plating System; the Epicage MIS Interbody system; and our Alphatec Solus ALIF device. The addition of these new products expands our depths in several spine verticals including cervical, interbody and MIS. We remain focused on full market release of each of these products. OsseoFix continues to do well in Europe as a vertebral body reconstruction implant and is being used in vertebral compression fractures trauma and in tumor surgery. While OsseoFix is on the market in Europe, last week, we filed a new investigational device exemption or IDE study protocol with the FDA for a pivotal 510(k) study, which after the agency’s approval, should begin enrolling patients in the second half of 2012. We closed out the original trial late in 2001, and submitted the data to the FDA as a feasibility study. And we will be publishing the results. We exceeded all of our endpoints and believe that our new study should allow us to more rapidly enroll patients. OsseoScrew continues to gain acceptance in Europe as an alternative to cement augmented screws. We continue to be pleased with OsseoScrew’s ability to pull through or entire product line in for hospitals, due to its superior performance in complex constructs and patients with poor bone quality. In the U.S. we have so far been unable to get regulatory approval for the exciting technology. We remained committed to making this technology available to U.S. surgeons and patients and are in the process of reevaluating our FDA strategy, and we will keep you informed of our progress. Within our biologics platform, PureGen, our Osteoprogenitor Cell Allograft, continues to perform well in the marketplace and have been successfully implanted in more than 1300 patients through December. As you recall, in June of 2011, our partner Parcell Labs received an untitled letter from the FDA regarding PureGen. In the letter, the FDA raised questions in connection with Parcell’s position that PureGen is within the classification of human cell or tissue based products that are regulated solely under section 361 of the PHS Act. We subsequently met with the agency and provided more complete information about the function of PureGen. During the meeting we also presented safety data collected on over 300 patients which showed an adverse event rate that compares favorably to other bone grafting options. For 2012, we will continue to look for new geographies, where we can leverage our products. We believe that our global focus on new markets, especially emerging markets in Asia Pacific and Latin America will continue to strengthen our global diversification. We remain quite pleased with the performance of our business in Japan which consistently produced solid double digit growth in 2011. We are also pleased to have begun selling Alphatec products in Australia in the fourth quarter through a new distribution partner. Customer feedback has been extremely positive and our team is excited to expand our brand. In closing I want to reiterate that the transformation of Alphatec Spine continues to make progress. Today our business has never been stronger and our ability to succeed never greater. We have the right product, strategies and global team in place to be successful in 2012 to help us achieve our goal of being a top 5 market leader. With today's announcement on realignment of responsibilities, we are undertaking a bold and new paradigm that we believe will allow Alphatec to take advantage of the opportunities and dislocations in the U.S. and global spine markets. You have our commitment that Alphatec Spine will remain dedicated to conducting its business with a sense of urgency, accountability and excellence. I will now turn the call over to Mike to discuss fourth quarter 2011 financial results and to provide our 2012 financial guidance. Mike?

Thank you, Dirk. The following remarks are related to our reported operating performance for the quarter ended December 31, 2011. To present comparative revenue results between 2010 and 2011, we are utilizing pro form revenue schedules. The company's pro forma revenues include Scient'x for all period of 2010 and do not include IMC for any period of 2010. The press release issued today provides our geographic sales segment performance on both the GAAP and a pro forma basis. On this call I will be discussing the actual performance of our business on a GAAP basis, and if applicable, referencing pro forma comparisons. Beginning with the first quarter of 2012 we will no longer need to use pro forma comparisons. Dirk has already covered U.S. and international sales for both the fourth quarter and full year, so I won't repeat those numbers. I will however echo Dirk’s comments that overall we are pleased with our revenue performance in spite of the difficult environment, and recognize our need to improve our operating performance. Gross profit for Q4 2011 was $24.9 million, or 50.3% of revenue, compared to $31.5 million or 68.4% of revenue in Q4 of 2010. Gross profit and gross margin in the fourth quarter were impacted by one time charges totaling $5.5 million, primarily related to inventory write-offs and adjustments. After netting out this impact, the underlying gross margin was approximately 61.4%. As compared to the prior period where a considerable favorability was attributable to high plant throughput, we experienced more moderate absorption of manufacturing costs in the current quarter. Favorable gross margins from our business in Japan was more than offset with increases in milestones and modest price impacts. Mixing gross margin associated with our biologics business also contributed an 80 basis point decline in margin. U.S. gross margins for Q4 2011 were 57.2% versus 78.1% reported in the Q4 2010. After adjusting for inventory write-offs and the equalization of manufacturing absorption, the adjusted gross margin for the fourth quarter was 71.6%. Increased milestone payments represent 140 basis points. Price and biologix mix were an additional 320 basis points. The remaining variances are attributable to other manufacturing activities. International gross margin was 36.9% for the fourth quarter of 2011, versus 46% in the fourth quarter of 2010. After adding back the onetime adjustments the overall gross margin would have been 53.4%. When comparing the gross margin of the fourth quarter of 2010, we have seen improvements directly attributable to the continued success of Japan, which enjoy that comfortably higher gross margin than the other regions of the world. As well as modest mix and cost improvements. In Q4 we invested significant resources to improve our inventory control and processes. In 2012, we anticipate achieving greater visibility and predictability with respect to our forecasted gross margins, and we believe that the level of write-offs experienced in 2011 should not repeat itself in 2012. As we announced on January 5, 2012, the company reached a global settlement agreement with Cross Medical Products, a subsidiary of Biomet, regarding a license agreement dispute and a patent infringement dispute. As part of the settlement Alphatec Spine has agreed to pay Cross Medical $18 million. And we made an initial payment of $5 million in January of 2012. In addition to the initial payment, we will make 13 payments of $1 million per quarter thereafter, starting in August of 2012. The company has expensed $9.8 million in the fourth quarter of 2011, which was charged to operating expenses as a legal settlement adjustment. Of the remaining $8.2 million, $8 million will be recorded as a licensed intangible asset to be amortized over the next 7 quarters in 2012 and 2013. Plus an associated imputed interest of $200,000. A non-cash charge of approximately $1.1 million per quarter of intangible asset amortization will be reflected in cost of goods sold in 2012. However, these amounts will be added back as part of our adjusted EBITDA calculation. Total operating expenses for Q4 2011, were $41.4 million, excluding the $9.8 million settlement expense I mentioned previously, operating expenses were $31.6 million, a decrease of $1.6 million compared to prior year of $33.2 million, and a sequential decline of $1.1 million from the $32.6 million reported in Q3 of 2011. The sequential improvement reflects the positive benefit from the activities undertaken over this past summer. In addition to aggressively managing our overall operating expense profile. After factoring in the additional onetime expense incurred in Q4 of 2011, our operating expenses were $30.5 million compared to Q4 of 2010. GAAP net loss for the fourth quarter of 2011 was $16 million or $0.18 per share, compared with a net loss of $2.9 million or $0.03 per share for the fourth quarter of 2010. Non-GAAP net loss for the fourth quarter of 2011 was $5.2 million or $0.06 per share compared to a non-GAAP net loss of $1.5 million or $0.02 per share reported for the fourth quarter of 2010. Non-GAAP net loss for the fourth quarter of 2011, includes adjustments of the $9.8 million related to the Cross Medical settlement as well as the amortization of intangible assets and restructuring expenses. Adjusted EBITDA was a negative $1.2 million in the fourth quarter of 2011, a decrease of $5.6 million compared to the $4.4 million reported for Q4 of 2010. The decline in adjusted EBITDA is due to reduced gross profit noted above, compared to Q4 2010, offset by lower operating expenses. Adjusted EBITDA represents net income or loss excluding the effect of interest taxes, depreciation, amortization, stock-based compensation and other nonrecurring items such as restructuring expense, IP R&D and transaction-related expenses. Cash and cash equivalents were $20.7 million at December 31, 2011, which is a $1.5 million decrease from the $22.1 million reported at September 30 of 2011. For the fourth quarter, the business operations generated $2 million of cash flow, which was offset by a further $3.5 million of additional debt repayments associated with our working capital line of credit. Cash and cash equivalents at the end of Q4 2011, reflects a $2.5 million decrease from the $23.2 million at December 31, 2010. Excluding debt repayments of $5 million, our business generated $2.5 million of cash flow for the year. The debt repayments associated with our working capital line of credit, were a function of a covenant violation associated with calculated adjusted EBITDA. Our bankers waived the fourth quarter violation and in January restored $2.5 million of the repayments. The remaining $2.5 million in repayments will be used for reduction in our overall credit facility and will reduce the total amount of debt owed by the company. We remain committed to generating cash flow and improving our level of profitability in 2012 in order to support the additional financial obligation of the Biomet settlement. As of December 31, 2011, our net inventory position was $45.9 million, a decrease of $2.9 million versus Q3 of 2011. Our net accounts receivable at the end of Q4 2011 were $41.7 million, an increase of $1.9 million or 4.8% as compared to Q3 of 2011. Our days sales outstanding were in line with the previous quarter and represented a solid performance given our geographic mix of revenues. As we transition into 2012, our clear focus remains on improving our global gross margin and operating expenses profile to ensure that business generates an operating profit and an ability to generate superior cash flow to meet our financial obligations and to sustain the growth of the business. Our financial guidance for 2012 is as follows. For full year 2012, annual revenue guidance will be in the range $204 million to $209 million, growth of 3% and 6% respectively. We anticipate our gross margin in 2011 to be in the range starting from the low 60s in Q1 and improving sequentially through the rest of the year, as we focus on our major initiatives. Adjusted EBITDA guidance will be in the range of $23 million to $27 million, or 11% to 13% of sales. We anticipate generating positive cash flow for the full year of 2012, while still servicing our debt and settlement obligations. With several new products recently introduced and transitioning to full commercial release the revenue contributions that we expect from these new products will accrue towards the second half of 2012. In addition the company's revenue guidance range includes only modest contributions from PureGen, our Osteoprogenitor Cell Allograft. Now I would like to turn the call back to Dirk.

Thank you, Mike. The takeaways from the fourth quarter are that we continued to generate solid top line growth, we expect the global spine market in 2012 to remain challenging but we will continue to address this environment by controlling what we can, focusing on innovation to maintain a continuous flow of new products, expanding our global footprint, reducing our manufacturing cost and right-sizing our operating expense structure to drive improved profitability and cash flow. Longer-term, we continue to believe that the spine market fundamentals remain quite exciting as the global population ages. People over the age of 65 years are expected to account for disproportionately large number of future spine procedures due to the effects of general wear and tear as they maintain active lifestyles later in life, compounded by a higher prevalence of disease states such as obesity, diabetes and osteoporosis. Over time, we expect our revenue mix to continue to migrate from our core fusion business that today represents about 3/4 of our sales, to higher growth spine solutions that will treat the aging spine. As a recognized leader in commercializing innovative technologies, Alphatec Spine is well positioned to continue to capitalize on these growing trends in the spine market. We continue to be uniquely positioned to achieve our goal of being the leading independent spine company in the market. Thank you and now I would like to open the line up to your questions.

[Operator Instructions] We have a question from Bill Plovanic of Canaccord.

So, I just have 2 questions. One, your commentary that the pricing and volume pressures were moderating given that your biologics grew in the U.S. year-over-year. That would mean your metal business has probably been pretty flat sequentially in the U.S. And I am just trying to figure out or get a kind of color at why that maybe occurring and what is really going to get that moving in the right direction again?

Bill, so that’s a good question. It was basically a flat. Part of that relates to a product that we had to stop distributing, primarily in the fourth quarter. It’s a pedicle screw system called Xenon. We discovered a regulatory glitch and needed to clear that up with some supplemental filings. We have done that and we have got that cleared up and we expect to relaunch it by the end of the quarter but that had about a 3% impact on our growth rate. So overall, we think the U.S. business is, that aside, is still growing at a reasonably good rate.

Well that’s a pretty significant impact. And you think those customers will come back?

Well, it will take a little bit of time. We will relaunch it. But we think we can regain certainly a portion of it.

Okay. And then you gave pretty good guidance on some of the things going on in terms of expenses going forward, but I really want to zero in on the R&D line. I mean that’s come down pretty significantly. We were running over $5 million and now that has just hit a bottom that we haven’t seen and I don’t know, probably since 2009 in terms of a run rate. And I am curious as to going forward, is this a new run rate we are looking at? Are you looking to maybe scale back on some of the unnecessary spending in R&D to maintain drive to profitability you are looking for or, kind of just any color is helpful.

So Bill, a couple of things there. We have had a couple of major projects that have now transitioned out or are transitioning out of R&D into commercialization. So we had a pretty heavy burn rate in 2011 on some of the products and developments. Also in addition, we have obviously made some choices in terms of the programs that we are going to invest in. So it’s more of a timing issues per say than just a conscious effort to reduce it. Although in fairness as we go into 2012, looking at the overall portfolio of our operating expenses, we do need to transition some of that spend into the clinical trial that is going to be necessary to bring some of these programs to fruition.

So if I want to look at this, if you were running closer to an 8% to 10% rate and exit the year at 6.5%, should we think it more going back to that 8% to 9% for R&D on a go forward basis or?

I would certainly take it up on a go forward basis.

Our next question is from Raj Denhoy of Jefferies & Company.

This is Amy in for Raj. I guess the first question, on the Q3 call, you all noted there were a number of stocking orders that were going to roll into the 4Q numbers. And as well, I know you all mentioned that, you thought that Australia was going to be relatively strong from a stock perspective. Could you provide a little more detail into the international market and how much was comprised of stocking?

Yes, actually a couple of those orders that we talked about have still not -- they are still in the works, actually. One of them actually came in this quarter and the other one is continuing to go forward on the international side. So there is some timing issues in terms of regulatory approval that sort of has delayed some of that. So we will continue to work through that. It’s hard to predict exactly when those orders come in just based on so many moving parts between the regulatory process of that particular country, import licenses and everything else.

Great. And then you also noted that you though Russia would be coming online for this quarter?

That’s the one that we are still pursuing.

Okay. And then I guess regarding PureGen, I think on the Q3 call you all had already presented to the FDA regarding the safety data, if I am not mistaken. So has there been any communication with the FDA since then or any...?

You are referring to PureGen, correct?

Yes. Sorry, PureGen, yes.

Yes, there is ongoing dialog with the FDA.

Okay, so no timeline for when you all could imagine a resolution and still no impact to your marketing of the product?

That’s correct. The product continues to be available to our customers and we continue to work very closely with the FDA.

Great. And then just one more on Solus. I know you all were still on beta launch last quarter and expected to go to full commercial launch this quarter. Is that still on track?

We are moving towards the commercial launch. The targeted day was towards the end of this quarter, may slip a little bit, but the beta is continuing to do quite well.

Our next question is from Josh Jennings of Cowen and Company.

Just, first off in terms of -- in Q4 you talked about some headwinds that you are facing. Can you quantify them at all in terms of both U.S. and international marketplaces. How much talking to your physician and hospital customers, what type of volume pressure were you seeing and maybe just directionally? And then also for Alphatec specifically what's the pricing pressure environment like?

I will start with the pricing pressure. Actually, sequentially we are continuing to see it moderate. So I think that’s a good sign in terms of year-over-year. And that I am talking specifically about the U.S. There continues to be a volume pressure in terms of procedures especially around lumbar surgery, degenerative disc and those types of things. Again, somewhat dependent on the surgeon’s practice but that certainly continues to be a pressure point as -- and I think we will be going forward for a while. And then the other area of headwinds is really the sovereign debt issues in Europe and the impact that’s having on our distributors’ ability to access to credit lines and pressure within the healthcare systems. So we think we understand those at this point but it continues to be a challenging environment. But in that environment also is a lot of opportunity.

[indiscernible] competitors coming on pricing pressure in the mid-single digit, some in the higher single digits. So are you willing to break that out for Alphatec specifically?

So for the U.S. marketplace and our hospital pricing, year-over-year we are low single digits and sequentially it’s less than 2%.

And looking at guidance, for 2102, what are the some of the assumptions you have baked in, in terms of U.S. and international market growth. And then maybe just sort of on the -- and continued pricing pressure, are looking for this direction. I know probably don’t want to give out specific numbers but a stable environment, increasing headwinds or are less than headwinds.

So I think overall we are continuing to forecast and see pricing pressures virtually globally. And so that’s built into some of our assumptions. I think in Japan specifically there is a reimbursement rate cut that’s coming in April, and that is built into our assumptions as well. So we continue to see, what I can say is, downward trends in pricing, pretty much throughout the regions where we compete. In terms of category volumes, I think depending on your point of reference, the U.S. is anywhere from flat to down to maybe up a little bit, but essentially flat. Europe we see as zero to down, given some of the macro pressures that we have. And then we have modest category increases in other regions, Latin America and Asia, driven principally by some of the larger markets that we participate in. So we are not looking bullish at category and we are not looking bullish at pricing.

Okay. Can you comment specifically on the biologics market? We had some disappointing results from 2 high profile competitors. And what are you guys seeing in the marketplace? You commented on a strong biologics performance this quarter, but you have the Infuse issues out there. What are the outside -- is the concern around biologics is Infuse not providing or the disruption not providing the opportunity for other players. Maybe just some color on that and where you see the opportunities in biologics in 2012?

Biologics continues to be one of our focus areas going forward along with aging spine and minimally invasive. So it is an area of focus for us. We are quite pleased with the results in 2011 and we had a fairly broad product line across the spectrum. We have a product called ProFuse that is doing extremely well for us. We are actually seeing somewhat of a pickup in allograft which may be related to the situation within in Infuse. So I think that whole space is somewhat in flux but we see it as an area of opportunity and feel quite good about our position and our ability to grow in it.

And any update on distributor adds in the quarter or direct sales reps adds and any guidance towards expectations for adding distributors and sales reps in 2012?

Not in terms of specifics. But obviously our opportunities both internationally with some markets where we have not penetrated yet. Russia being a very important one for us in 2012 but there is some additional markets we think we have some opportunity in. And in the U.S. there is a fair amount of dislocation that we are starting to see with the Synthes, DePuy merger. And we think we are well positioned as a company to take advantage of some of that by having a very broad product line, some very unique products. And I don’t think we are prepared to give any specific numbers but we are definitely aware and targeting a number of situations.

Our next question is from Mark Landy of Summer Street.

Yes, just a quick one on the Medtech tax . Are you going to be able to pass through to that future customers in 2013 or is that going to be a direct hit to the P&L?

I don’t think we are looking at as a direct hit to the P&L yet, Mark. But in fairness, I don’t think we have given it a full due diligence yet in terms of how we would approach it.

Okay. So is it fair to assume just from the outset that perhaps a portion will be a direct hit and some portion will be passed through on...

That would clearly be our objective but I don’t know I want to get more specific then that at this point.

Okay. Fair enough. And then did I hear you correctly say that pricing was down 2% sequentially.

I said less than 2% sequentially. It was down mid-single digits year-over-year.

Correct. So if I have a look at the fourth quarter specific [indiscernible], of December and the end of the year. How much of that pricing pressure was stocking in sense of end of the year versus just general market pricing pressure?

I would say in the main it was general market pressure because our stocking business really didn’t change materially one quarter to the other.

Okay. And then lastly, as I kind of look out to 2012 on a relative to where you were in this position looking out at 2011, I think a lot of things, just a lot of moving parts relative to approval and I suppose PureGen was I think meant to be a greater contributor in 2012 and it will be. And then also there have been some stocking -- delays and stocking issues. Kind of net-net if I look at 2012 relative to the 2011 plan, how much of the delay in stocking out of 2011 that will fall into 2012, will make up for some of the delay in the approvals and I suppose the reduced impact of PureGen?

I am trying to think where to begin on that one. I mean clearly we've had some missteps with some new product introductions and I think we have had some -- we have had opportunities to participate internationally that haven’t materialized as quick as we would have liked. So for example, if you look at PureGen, I think our original expectations for PureGen post approval were quite large. I think the impact of the untitled letter and the continued uncertainty has tempered that growth expectation. I think the overall slowdown in the category is having its impact in terms of the magnitude of the size of our new product introduction. I think as we look to opportunity for example, like Russia and Australia in Q4. We got Australia but I think it could have been bigger. We didn’t get Russia but we are still looking forward to in 2012. So I think that you have got puts and calls all over the place. And so it would be difficult for me to kind of box in $10 million of something that should have occurred in ’11 is a bolt-on for ’12. I just don’t see as clean as that.

But net-net, would you say that it’s a negative or a positive, if you sum up all of those thoughts, would you say you’re carrying over relative to initial expectations for 2012, ’11 into 2012. Would that be a net positive or do you think a net negative as you set down on your operating expenses for 2012?

I think that if you look at the underlying plans you might view it as a positive, but I think you have also got to look at some of the macro headwinds in some of the businesses where we compete. And so in potential declines in the base business, which is why we think about guidance here, we’ve tried to be pretty conservative in terms of what we believe is deliverable in ’12, for all the reasons we are talking about.

Right. And that’s exactly you hit the nail on the head, Mike. I am trying to figure out what the upside is relative to the initial expectation, if there is any, versus those puts and calls. But we can take some of that offline that’s not a problem.

[Operator Instructions] There are no further questions in the queue right now. I would like to turn the call over to Dirk Kuyper for any closing remarks.

Okay. Thank you very much for joining us today. We are very excited about the realignment in the management of the company and believe that this will position Alphatec very well to take advantage of the challenges and the opportunities that are out there today. So with that we will conclude the call. Thank you and good evening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.