Alphatec Holdings, Inc. (ATEC) Q2 2015 Earnings Report, Transcript and Summary

Welcome to Alphatec Spine Second Quarter 2015 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your host, Christine Zedelmayer, Head of Investor Relations at Alphatec Spine.

Thank you and good afternoon, and welcome to Alphatec Spine's quarterly update conference call to discuss our second quarter 2015 financial and operating results, as well as provide an update on our outlook for the remainder of 2015. This afternoon, our comments will build on the press release we issued earlier today. Before we begin, I would like to remind you that this conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding the company's expectations regarding its financial performance, strategies for revenue growth and operating improvement, development of new products, customer acceptance of the company's products, and overall trends and economic conditions in the company's markets. The company undertakes no obligation to update the information presented on the conference call. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. For more information about potential factors that could adversely affect our business and financial results, we suggest you review our filings with the Securities and Exchange Commission. Throughout the conference call, the company will reference some financial metrics that are derived in accordance with Generally Accepted Accounting Principles, or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the company's results internally. However, non-GAAP results are not prepared in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as supplement to and not as a supplement for financial statements prepared in accordance with GAAP. Now, let me introduce the other members of the Alphatec Management team that are here with me today: Jim Corbett, President and Chief Executive Officer; Mike O'Neill, Chief Financial Officer; and Ebun Garner, General Counsel. I will now turn the call over to Mr. Jim Corbett.

Thanks, Christine. Good afternoon, and welcome to Alphatec's quarterly conference call. Today I'm going to begin with an overview of the results on a high level, followed by an update to our strategic initiatives. Mike O'Neill will then provide more detail on our Q2 financial results. For the quarter, consolidated revenues were $46.6 million as reported down 12% from prior year of $53.2 million. When adjusted for FX total revenue was $50.2 million down 5.6%. In the U.S. we had sales of $27.2 million in Q2 2015, against $34.5 million in Q2 2014, down 21% from prior year and down 13% year-to-date. This is below our expectations and we are going to discuss that more fully on this call including why that is, and what we are doing about it. Internationally, we delivered another strong quarter of $19.4 million up 23% on a constant currency basis and up 4% on an as reported basis. International continues to be strong for the third quarter in a row and we’re really pleased with the progress we are making. We are ahead on many of our growth initiatives that we've been working on internationally. Mark Bullivant our Senior Vice President of International is making quite an impact with his leadership and a rejuvenation of our international management team. Regarding adjusted EBITDA, we delivered $3.2 million behind prior year of 51%. This is a consequence of two issues. The primary driver is our miss on sales in the U.S. Missing sales is obviously going to affect our EBITDA most significantly. We are also affected by FX which given the significant contribution of our international revenue, to our total revenue as a percent of sales has had a significant impact on our year-over-year performance. Before I go into more detail about the quarter, I want to briefly discus the warning letter that we received from the FDA in late July. First let me tell you what it's not. It's not patient injury, it's not Alphatec violating regulation around promotion. What it is, is primarily a failure of our quality system methodology to integrate and acquire product into our existing quality system. We made an acquisition a few years ago where we acquired a number of products from Phygen, some of which we never intended to launch to the market and never physically distributed from Carlsbad. However, for those products that we never intended to launch, we also do not integrate them into our quality system. Whether we integrate them or not, we own that history. Consequently, I’m taking care of this along with the entire management team. Personally, I am products to the quality moment that we started buybacks during the 80s and compliance as core to who I am as leader. In 25 years as a President and CEO, I have never had a warning letter and I will make sure we take care of this one. We will move quickly to address the agencies concerns, I have no intention of letting another one of this happen. Now, I want to provide you an update on our strategic scoreboard. As we promised in prior calls, we will use this format to report to you our progress. This gives us a format to talk about the transformation of Alphatec in an organized manner. I'd like to take a minute to review the three pillars of our transformation. First, is our go-to-market products strategy. This includes the products that we have on the market, where we are focusing our selling efforts, as well as our product pipeline. Second, is the commercial transformation worldwide, both in participation in the full market but also how our sales model functions. Third, is our manufacturing and physical transformation. Today, I'm going to start with the second pillar, which is all about commercial transformation. One of the reasons we are focusing on this pillar first is because we've been doing things in order. Although it might be intuitive, a commercial transformation is irrelevant if we don't have the products that customers want and can't make them for a profit when selling them. Getting our go-to-market product strategy correct and compelling to the customer and improving our underlying cost structure are both absolutely necessary before we can approve sales execution. We've been focusing heavily on these two pillars of our strategy. Pillars one and three for the last year. I couldn't be more excited about our product flow and the products that we're going to market with today, and we've passed through the initial face, in fact the tipping point in terms of our operational transformation, we believe both of these components of our transformation are in terrific shape. We anticipate that this momentum will immediately begin to positively shape our sales and profitability performance. Now that we have those two pillars going in the right direction, we are putting our primary focus and attention on getting our commercial execution right. Pillar number two, this initiative is designed to enable our future topline growth. With that, let me talk more specifically about our commercial transformation. Specifically, our U.S. commercial model today. Last quarter , we told you about an unique opportunity for Alphatec. We outlined that almost 90% of U.S. surgeons do not even have an Alphatec sales person assigned to them. One of our model transformations is to change that reality and improve that coverage and market participation. This is created 40 of the top 100 metro area markets as our first target. During the first half of this year, we achieved getting 38 of those 40 markets covered. While this is an excellent improvement, one of the consequences is how it affected our organization and our performance. We're talking about recruiting new selling reps, building and executing both on boarding and training plans for the new reps and creating and implementing a management methodology for direct selling employees that we didn't have before. We've been transforming our selling model within the constraints of the operating expense commitment we've previously made, which is, not to spend ahead of our sales. All of this expansion and ramp up activity has been boring our existing team. Frankly, this takes a significant amount of time and has turned into a virtual tax on our performance. Attacks that needs to be paid, but attacks nonetheless. The consequences in this case of the attacks is that we didn't get the sales execution in Q2 that we expected. That said, we can also look back and see if that affected us during Q1 as well. Going forward, we will see the benefits we've realized from this investment in time and effort. Here's what it is, number one, today we have 38 new reps on the street and new territories that represents upside for us. The salesforce is focused on Arsenal, Arsenal CBX, Battalion, and starting this month we'll be selling Alphatec Neocore. Alphatec Neocore is a synthetic biologic product we've added to our portfolio this quarter that we're very excited about. I'll be talking more about that product shortly. Number two, we have implemented new systems and processes and work through many of other sales issues that come with an expansion of this magnitude. We feel good about the progress we've made and believe the heavy lifting in the U.S. is well underway. We believe it's up from here. As I mentioned earlier on the call, we have made really good progress on our international growth initiatives as well. In Q2, we completed our expansion into eight EU countries where we have regulatory approval and reimbursement, but had little or no sales presence previously. The strong 23% growth we achieved during Q2 was not directly attributable to these new country initiatives. We believe this expansion in the EU provides opportunities for further momentum in the second half of this year and 2016. Let's turn our attention to pillar number one, go-to-market strategy for innovation today and going forward. Probably the biggest event of the quarter is our signing of the Haider Biologics global supply agreement. This is a 10 year renewable exclusive agreement between the two companies. What it provides is the Alphatec Neocore synthetic biologic product portfolio and right to distribute future biologics products developed with Haider. Under this agreement, we expect to get a number of benefits with this technology that will be very positive for the Company and our commercial strategy worldwide. First, it's global. Because it is a synthetic, Alphatec Neocore allows us to compete in global markets, like the European Union. Our previous biologics strategy was primarily focused on the U.S., we relied on an array of manufacturers which made it costly and complex to manage. The agreement for Alphatec Neocore enables us to work with one partner, so we can build a long enduring relationship which will include development, a future biologic, and synthetic osteobiologic products. Over the longer term, we intend to exclusively focus on globally commercializing and selling Alphatec Neocore and other products developed with Haider Biologics, and transitioning out of certain other biologic products in our current portfolio. Secondly, another advantage that I mentioned is that it's a synthetic, which represents a very large market opportunity in spine. Nearly 50% of the global osteobiologics market is synthetic. We will focus on technical selling of a single synthetic biologic and bringing the strength of our emerging commercial capability to bear in the U.S. and globally. Thirdly, we benefit from our favorable sharing of cost structure with Haider. One of the challenges in the field of biologics is that there is a very price dynamic reality to the spine segment. We will be able to compete across a range of different price points within the U.S. and around the world through this unique partnership and cost structure that we share with Haider. With this agreement, we have taken a great step forward in terms of developing our biologics focus and strategy. We're looking forward to launching Alphatec Neocore in the U.S. which is occurring this month. Moving now to Arsenal, as mentioned in prior calls, Arsenal really went into full unconstrained launch in the U.S. unlike Q1. When it went, you can actually turn your sales organization completely loose. You ramp up, it begins speaking with customers and start going through the process of hospital approval and evaluations. In a limited launch the sales force doesn't do that extensively. Q2 was still early for us to start seeing the full proof. We expect to increase our penetration in the second half of this year as a result. Second, the limited launch of Arsenal CBX is now underway. CBX or Cortical Bone Fixation is a less innovative, midline focused method for cortical screw placement where we see the very positive early feedback on CBX and we'll begin the commercial launch shortly. Next, let's talk about Battalion, our next generation titanium-coated PEEK interbody system. If you want to understand the advantage of what titanium coating does, let's think about it like a petri dish, a place where you can create an environment for growth. In spine, the objective is to have the bone grow into the medium and have the medium to grow into. The porous surface of titanium is what is believed to be that petri dish for spine and for fusion. That's really what titanium coating is all about and we think that surface modification is where the market is going. We believe that we are on the forefront of this wave, which positions us very well for the future. We couldn't be more excited about Battalion, because it represents a cross selling opportunity in a high percentage of the Arsenal cases. While we are outlaying the groundwork with Arsenal, we're going to come back to those same customers and promote Battalion. We're going to skip the limited market release phase for Battalion and go right into full launch in Q3 based on a confidence in the product and instrument design. Why are we doing that? The whole reason to do a limited market release is to gain confidence in the instrument design. With Battalion, there are so many overlapping instruments with Arsenal, we don't have the uncertainty that we would normally have. We don't have 92 new instruments like we did with Arsenal. We are actually determined that there are only two or three instruments that are subject to even any form of modification at all. We are quite confident that the likelihood of modifications is well because those instruments function very well now in our prelaunch work and could ever lapse. We are going to track them carefully but today, we can see no reason to hold back from a full launch. Now moving onto our big programs in the pipeline. We remain on schedule for both our lateral and deformity programs and are looking forward to our first quarter 2016 launch. This continues to reaffirm our strategy focused on getting big market products to market in a timely manner. We're very concentrated and determined, predictable progress by focusing 80% of our resources on these two programs. We’re hitting our timelines next update will be on a Q3 call. Right now we’re right on course and I’m excited about the future opportunity for both of these products. We’re continuing to move our pillar number one our go to market portfolio impact line forward at a terrific pace. Now let me provide an update with specific details on pillar number 3, transforming our manufacturing operations and our fiscal distribution. First I’d like to emphasize what we’re doing and why we’re doing it. Our core competences at Alphatec are design, innovation, and commercialization that is where we want to put our resources focusing on designing and innovating new implants and instrumentation and globally commercializing our portfolio. With that said our cost to make and our cost to physically distributed is too high to be sustainable. Over the past 12 months we’ve been working on a manufacturing transformation, which includes a fully outsourced model. We have announced this to all of our employees. We expect to be fully outsourced by the end of 2015. this will mean a reduction in approximately 100 physicians at Alphatec in Carlsbad. These employees have done a great job for us and we’re grateful for the contribution each of them has made to Alphatec over the years. We also recognize that this is a difficult time for affected employees and their families and we’re actively helping them with the transition. Now strategically looking forward all we know is that a $100 million of inventory and success it’s combined doesn’t work for a $200 million. One of the underlying cost drivers is maintaining the manufacturing infrastructure to be an independent manufacturer. Along those lines we’ve always outsourced instrumentation in fact we’ve outsourced our implants and instruments from the beginning so this is not new to us. The senior leadership team has experienced outsourcing, manufacturing and distribution partnering with external suppliers and sharing a quality system. We have designed this transition to be seamless to our customers provide them with the same high-quality products and on time delivery that they’ve always received from us. We expect to realize several positive benefits from this transition. First we expect to have a reduction in capital expense to the magnitude of tens of millions of dollars over the next few years. Second we expect to have a reduction in our unit cost for implants, which is what we manufactured internally in excess of double-digit reductions. Third we’ll continue to keep the focus on reducing our instrumentation cost at or better there are 50% goal that we’ve achieved with ourselves. In fact we’ve extended our 50% cost reduction standard to the time product line and we expect to also to do so with the lateral and deformity programs. The methodologies we’ve designed and implemented are really working for us. Fourth is our outsourcing of our physical distribution model. Our goal is to increase set turns per month by nearly 2x by the middle of next year. We’ll have more details on this program during our Q3 call, but at a high level our model will allow us to provide significant portion of our customers in the U.S. better service levels in terms of on time delivery and we utilize our inventory more effectively increase our set turns and achieve our goals of operations to physical distribution transformation. We expect that the aggregate benefit of this transformation to the economics of the company will be very significant. We’re fulfilling the promise that we described in February for becoming a more lean and mean cost competitive company in terms of how we operate our business. Through continued execution we believe we’ll be able to invest more in R&D, more in commercialization, and become a more competitive company. In closing we’ve made good progress towards achieving our strategic pillars and remain on track with our transformation of the company. We’ve made significant changes across the organization this year and we believe the investments that we’re making will result in a better quality business in the second half of 2015 and into 2016. I look forward to the Q&A where we can talk about any of your questions or thoughts that you may have about our results and our progress on our strategic initiatives. Now Mike is going to take a few moments and take you through the details on our financial results and provide an update on our outlook for the remainder of the year.

Thanks Jim. I’m going to focus the majority of my remarks on the reported operating performance for the second quarter that ended June 30, 2015. I will then provide an update on our full year 2015 guidance. I would like to begin with foreign exchange as it relates to our second quarter results. The strong U.S. dollar affects us more than most of our pure play spine peers due to the higher share of international revenue. Approximately 42% of our business as reported this quarter was international. This represents our highest quarter of international contribution to the top line. While the impact foreign exchange is most evident in the revenue line, currency also impact our gross margin and adjusted EBITDA. Ordinarily we deal with and manage currency through the P&L as we would any other expense or exposure. However, the buyers allow revenue to the international regions in this quarter meant that negative impact of foreign exchange coupled with regional mix led to a significant impact in our gross profit and gross margin. This impact could not be covered within the P&L and contributed greatly to the deterioration of profitability this quarter. Our consolidated revenues were impacted by lower U.S. sales and $3.6 million of currency headwinds, primarily related to declines in the value of the Japanese yen and euro against the U.S. dollar. When adjusted for currency, consolidated revenues were down 5.6%. Our consolidated gross profit for the second quarter was $27.5 million, compared to $36.1 million for the second quarter of 2014. The decline of 23.8% over prior year was primarily due to regional mix in volume this includes lower sales volume in the U.S. the effective currency translation and $1.9 million in write-offs associated with manufacturing, quality assurance equipment, and product lifecycle management. Our Q2 consolidated gross margin was 59% versus prior year of 67.9% the 8.9 percentage decline is primarily due to foreign exchange as previously discussed unfavorable variation in regional and product mix as well as the write-offs referenced earlier. U.S. gross margin was 58.7% in Q2 compared to 71.8% in Q2 of 2014 the 13.1 percentage point decline is primarily attributable to, unfavorable variation in price, product mix and again the previously mentioned write-offs. International gross margins on a reported basis were 59.5% for Q2, compared to 60.8% in Q2 of 2014. The effect of foreign exchange was significantly greater than the overall 1.3 percentage point decline in gross margins excluding currency our international gross margins improved year-over-year reflecting the completion of our French restructuring in 2014. Total operating expenses for Q2 2015 were $30.4 million, a decrease of 11.4% compared to the second quarter of 2014. This is a result of our continued fiscal discipline across the organization with savings in R&D and SG&A. This is a great example of our ongoing commitment to controlling expenses and focusing our resources on the strategic plan. I would also note that there are no restructuring expenses in the second quarter associated with our manufacturing transformation that Jim outlined earlier. I’ll provide a little more commentary on that subject in a minute. Adjusted EBITDA, a measure we guide to, was $3.8 million in the second quarter of 2015, or 8% of revenues, compared to $7.7 million or 14.4% of revenues reported for the second quarter of 2014. Adjusted EBITDA was unfavorably impacted by lower U.S. sales volume and fluctuations in foreign exchange flowing through gross profit during Q2 when compared to the prior year. Please note that adjusted EBITDA excludes the effects of interest and other expenses taxes, depreciation, amortization and stock based compensation. GAAP net loss for Q2 2015 was $3.9 million, or negative $0.04 per share, basic and diluted, compared to a GAAP net loss of $2.9 million or negative $0.03 per share, basic and diluted, and for the second quarter of 2014. As of June 30, 2015, unrestricted cash and cash equivalents were $8.9 million compared to the $11.4 million reported at March 31, 2015. Additionally, the company has $4.6 million of restricted cash, which must be used for the future payment obligations associated with the OrthoTec settlement. In early July we entered into a second amendment with our senior secured lender mid-cap financial. This amendment increased our unamortized loan commitments from $25.8 million to $30.8 million. We believe the take in this additional draw was prudent given the significant transformational activities that we have underway. We also have a revolving line of credit of $40 million with mid-cap of which we have drawn $29 million to-date. With this additional $5 million term loan our credit facilities totaled approximately $86 million, $60 million from mid-cap financial our senior secured lender and $26 million from Deerfield. We continue to expect to incur approximately $3 million to $4 million in cash interest expense through after the second half of 2015. With that, I would now like to provide an update on our forward-looking guidance for the remainder of 2015. We making steady progress on our strategic pillars. And we continue to expect momentum to build in the back half of 2015. However, given our revenue results for the first half of the year, we believe it’s appropriate to adjust our annual guidance at this time based on our expectations for commercial expansion and ramp up. As a reminder, given the foreign currency headwinds, we previously issued revenue guidance in constant currency versus 2014. In 2015, we are adjusting our guidance to full year constant currency revenue of negative 2.5% to positive 1.3%, growth versus 2014. This represents constant currency revenue of approximately $202 million to $210 million. We’re also adjusting our guidance for non-GAAP adjusted EBITDA and expect it to be in the range of $22 million to $26 million, or representing 11% to 12% of annual revenue. We anticipate that expenses associated with our manufacturing transformation will be limited to the following. Severance and employee related costs totaling approximately $1 million that will be booked as a restructuring expense. Accelerated depreciation on certain manufacturing assets and plant closing cost so approximately $3 million. These expenses will be incurred in the second half of 2015 and the first half of 2016. These items are explicitly excluded from our adjusted EBITDA guidance. In summary Q2 was a challenging quarter on the revenue side. However, we understand the issues and our team is actively addressing them. As we continue our U.S. commercial transformation that Jim, discussed earlier we should begin to see a pickup in our top line momentum beginning in the second half of this year. We anticipate that this will improve regional mix as well as our overall gross profit and gross margins. Our operational transformation of manufacturing and distribution is targeted at both implant and instrument cost reductions, cycle time reductions for secularization, and substantial reductions in our inventory and fixed asset investments. Over the next two to three years we expect to improve our unit costs through double-digit cost reductions for our implants. Additionally we expect to drive efficiencies in inventory and fixed assets that will significantly improve our capital deployment by tens of millions of dollars. We’re well underway executing our corporate transformation. Our employees are committed and engaged to have strategic vision and we’re diligently working to bring that vision to reality. The senior leadership team remains confident and we expect that the actions we’re taking in the plans we’re executing will deliver our strategic objectives of accelerating revenue growth generating free cash flow and improving the return on our invested capital. Each of these has the necessary background and experience to address any challenges as we continue to our transformation journey. With that I’d like to turn the call back over to Jim.

Thanks, Mike. We took positive steps forward on our strategic initiatives in Q2. We made strides with our go-to-market product portfolio strategy with Arsenal, Battalion, and the addition of Alphatec Neocore. We took bold steps to reduce our cost structure with a transformation of our manufacturing and distribution. Today we’re actively engaged on our commercial execution. We remain focused and committed to our three pillar strategy. We're making progress towards becoming leaner and more competitive organization. With that, I look forward to answering any questions you may have.

[Operator Instructions] Our first question comes from the line of Mark Landy from Northland Capital. Your question please.

So, I guess Jim is right at the back, if you look at the U.S. sales and if you can put them in buckets right, the disruption from the Arsenal launch I guess disruption from the territory lines and expansion i.e. the 40 metro areas. Some product gets, there’s some loss business there than perhaps some other disruption that have been coaching those three buckets. Is it possible just to walk us through those and just get us a sense of where you feel the greatest loss came from and where the opportunity is to most quickly turn it around?

Mark, first of all there’s actually one bucket that I talked about and really it's about transformation. So for us, where we lost on execution was focusing on the expansion to new geographies where we didn’t have coverage before. So that took away from management time to recruit to onboard to train and sort of begin getting them up to speed. The two our estimation that's the driver of our execution miss. The current distribution channel wasn't affected as we basically put the 38 in territories where there was no coverage before. So there’s no disruption per say, to our existing channel other than the fact we didn’t adequately focus on them.

But Jim if I look at that just more less grey as more black and white, there is some underperformance within the existing sales channels correct, so I'm trying to quantify relative to the guidance and the expectation, was - what contributed to the overall underperformance and try and put some ranges around the underperformance looking at the existing sales channel, that's underperformance in 38 metros are just two more to come. And then other things that perhaps contributed that we haven’t discussed?

I think that from our point of view the focus on the expansion was the sort of the tax I described in my comments was the effect that contributed to our underperformance. The other elements that you described we really don’t see as being the issue, it was our management attention being focused on the expansion and in fact yes you’re right, our channel did sell less, but not for any of the possible reasons you described that we can determine.

Okay. If I look at the second quarter is it fair to consider that the low points of the year or should we think of maybe the third quarter with the seasonal impact that has been another step down in the actual revenue number and then the fourth quarter begins to build?

Well, for sure we don’t - as you know we don’t give quarterly guidance but our full year guidance is an expectation on our part that we’re up from Q2 in the second half.

Okay. So you’re not going to give me any help later it's a third quarter or the fourth quarter?

It just would change our hope communication pattern so we thought that would be.

Fair enough. And then Mike if you get trying just my arms around gross margin perhaps maybe looking out little bit, there's just a lot of moving pieces there. So you have the geographic mix, which you highlighted and then we get the outsourcing which comes I would think but the inventory build upfront to assist with the transfer of the manufacturing. And then you get the gain from perhaps if there isn’t inventory build, the release of that inventory build towards the system and then the upside from the benefit that you get in the manufacturing reduction cost and the pickup in sales. So can you help us just think perhaps maybe through gross margin as it marches through the second half of 2015 relative to the third quarter. And then how we could think about it - I know you haven’t guidance and we’ll not probably address but that’s not for the first half of 2016. So we can just try and get sense how we get to normalcy and what normalcy could look like?

So I think - our manufacturing transformation is targeted to end at the end of this year and our manufacturing activities here at the end of this year early 2016, was going to impact our margins for the remainder of 2015 is the success of the U.S. business. Our regional mix when their international U.S. business looks at each other and foreign exchange, so what's going to impact 2015 is going to be those items. There's not going to be a significant step function change in margins this year. As we enter 2016, you're right, we've got inventory that was built, we've got inventory that we're purchasing, and so we're going to see a transition throughout 2016, and primarily buyers towards the back-end of 2016. As to when we'll see that the margin improvement flow-through inventory through cost of goods from an outsourced manufacturing standpoint. The other thing to remember, the big win here from a manufacturing transformation is cost reduction, so inventory reduction, and inventory utilization. So it's the balance sheet and tax flow that's the big win. And we will see margin improvement in 2016 as a result of the transformations. But I want to keep pointing home that the balance sheet and the cash flow is where the real significant activity should play out.

So if I just look at 2015, full year projected gross margin versus 2014, is a 500 basis points step down a reasonable assumption, obviously given the largest step down in the second quarter, is that reasonable assumption, a reasonable place to be starting with?

I think you have to look at Q2 and the impact we have of our gross margin, extrapolate a normalized Q3 and Q4. I don't want to get into 500 basis points or what have you. I think, to the point that you are trying to draw is Q2 the low point, we are anticipating improvements throughout the remainder of 2015 into 2016.

Okay. Appreciate the questions guys. Thanks for taking them.

Thank you. Our next question comes from the line of William Plovanic from Canaccord Genuity. Your question, please.

Couple of questions, just on the guidance, just on the you gave us constant currency revenue growth and just kind of running through where the EUR/YEN trade and what we have seen, I'm coming up with about $10 million FX impact for the year. How does that sound to you?

It sounds little on the low side but not out of the ballpark.

Okay. And then, why wouldn't the U.S. business step down more from here. What’s going to stop that from occurring?

Well, if you look at the this is Jim, speaking if you look at what we did during the first half, as we focused on our transformation which meant improving our coverage in the 90% of the market we don't cover. So, in that event we did it by metro area we targeted 40 of the top 100 where Alphatec sales were zero, and filled 38 of those. So what we have in the second half is those 38 sets of feet on a street beginning their commercial activity and markets we previously didn't contribute, didn't participate in, so we have that on one hand. Secondly, we have the expansion of the Arsenal launch on the product side in our core distribution channel. We have that so the Arsenal goes into both that and our new channel which includes Arsenal CBX and includes the broader launch of Alphatec Neocore. So we have a lot of arrows in our quiver. We have to execute to be sure, but what we have. Is absolute broader coverage and we have strong product flow that is unconstrained at this point.

Okay. And then on the, so your North American business is down 20% year-over-year, you're saying it’s a lack of focus is the reason. Can you give us what the units were, what the pricing impact was year-over-year and if you had any mix benefit on that?

So without getting too much into the specifics, we obviously saw a price impact consistent I think with what we see generally in the marketplace. Mid single digits and below. We also saw a mix impact and it was more of a channel mix for us. It was what I would call our core hospital business where the biggest decline occurred in Q2 and that has more of a margin mix impact than others.

Okay. And then just the last question and I'll let others ask. As you think of the back half of the year, how much of that guidance is driven by new or recently launched products? And how much is distribution?

We don't really - as we give guidance we don't break it up in that manner, I'd like to answer for you , but we don't actually provide guidance on individual products or individual or groups of sales territories within the geographic markets. So, I want to help you but I think I'll have a different question.

I'm done. Thank you.

Okay. Thank you.

[Operator Instructions] Our next question comes from the line of [indiscernible] from Cowen and Company. Your question please?

Hi, good afternoon folks. Thanks for taking the question. Kind of just want to press a little bit more on the guidance side on the topline, as I understand that just on a back paper calculation, my consensus is about $3.5 million to $4 million and your full year guidance on a constant currency basis is down about 12. What is your expectation in terms of kind of revenue directionally on a second half of the year? I just want to get some color on that.

I think if you look at the constant currency guidance and you look at first half, second half, obviously there is growth, and I'll pick the midpoint, so you're looking at probably3% to 4% growth in constant currency, second half over first half, that factors in, and I would say in some parts of the world are traditionally slower Q3 and a stronger Q4.

Got it. And just in terms of obviously, you have noticed that there is a drop in the sales and marketing as a percent of sales. Directionally what is your expectation for that line going forward, I know you don't give quarterly guidance, but just want us help us think through in terms of modeling, how that number is going to trend off going into the second half of 2015 and going into 2016?

So I think what we have demonstrated over not just the first two quarters of 2015, but certainly the back end of 2014, is we've been quite disciplined in our operating expenses in general, and managing by the line-item. We've been very clear that we're not going to get ahead of the expense curve in terms of spending ahead of revenue and you should continue to expect that to be the case, going forward, both in 2015 and into 2016. We made the appropriate adjustments in operating expenses coming into 2015 to allow for example, for the expansion. We'll continue to make those trade-offs very consciously and objectively upfront so that we don't end up spending ahead of revenue line. So, my expectation is that the Company will continue to exhibit discipline in its operating expenses quarter-by-quarter.

Great. And last question from me. Can you talk a little bit, international was strong again this quarter with some really solid momentum. Can you talk about any details around the Arsenal's launch in Japan, any additional color would be appreciated. Thanks guys.

No, what I can tell you is that we have launched it. It's approximate second full month of launch versus early cases on early inventory. They have gone well and we have included the success of Arsenal in our forward guidance in terms of Japan. So it's going quite well.

Great. Thanks.

[Operator Instructions] And this does conclude the question and answer session of today's program. I'd like to hand the program back to Management for any further remarks.

So, I'd like to thank you all for spending your time on our quarterly conference call. Thank you very much. And we'll look forward to next quarter.