Alphatec Holdings

Target: US$4.00

Alphatec Spine is a small cap, spinal implant company that develops fully customizable fusion implants and instruments including pedicle screw and rod systems, lumbar plates, anterior cervical plates, and various spacers. The company employs a hybrid distribution model utilizing distributors and direct reps to market its products in the US and Japan.
All amounts in US$ unless otherwise noted.

Investment recommendation
We maintain our BUY rating and $4.00 target following news that Alphatec has undertaken a significant restructuring initiative within its European business unit Scient’x. The restructuring comes several years after the company acquired Scient’x in 2010 and includes a reduction in headcount as well as broader operational and manufacturing improvements.

While restructuring costs and one-time charges will  cloud the P&L in the near term, we view the initiative positively as it
demonstrates management’s continued focus on improving profitability and driving operating leverage. We note that management has elected to wait until the Q3/13 results call to provide more detailed guidance related to restructuring, and as a result we have not adjusted our model.
Investment highlights
 Alphatec announced its plans to restructure its European business unit, Scient’X, including streamlining operations and reducing headcount by as much as 76 positions.
 The restructuring is expected to reduce operating costs by $2M to $6M annually beginning in 2014.
 Alphatec management will provide a more detailed overview into the restructuring initiative on the Q3/13 results call.
We maintain our $4.00 price target based on a 2.0x EV/sales multiple applied to our 2014 revenue estimate of $215.1M. In our calculation, we assume cash of $12.9M, debt of $65.0M and shares outstanding of 95.9 million.



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