Alphatec Holdings, Inc.

Ladies and gentlemen, thank you for standing by. I'm Mark Francois, Senior Director of Investor Relations for Alphatec Spine.

Thank you for joining us today for Alphatec Spine's Conference Call to discuss our Third Quarter 2012 Financial and Operating Results. Speaking today will be Les Cross, Alphatec's Chairman and Chief Executive Officer; and Mike O'Neill, Alphatec's Vice President and Chief Financial Officer.

Also on the call with us today is Ebun Garner, our General Counsel.

During our prepared remarks, you'll be in a listen-only mode. After our prepared remarks have concluded, we'll open up the call for your questions.

As a reminder, this conference call is being recorded today, November 5, 2012. A replay will be available later today on our website and will remain available there for the next 30 days.

Before I turn the call over to Les, I must remind you that today's conference call contains forward-looking statements made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements include statements related to the company's revenue and adjusted EBITDA expectations for 2012, commercial and market conditions, expectations of closing the Phygen acquisition, contributions to the company's revenue and earnings in 2012 and 2013 from the Phygen acquisition, the introduction of new products and sales and marketing strategies, improvement to the company's cost structure and operating margins and operational initiatives.

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 actual results to materially differ from the forward-looking statements. The company undertakes no obligation to update any forward-looking statements as a result of new information, future events or otherwise.

Many of these risks, uncertainties and assumptions are discussed in our 2011 annual report on Form 10-K for the year ended December 31, 2011, filed on March 5, 2012 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 at www.alphatecspine.com.

And with that, I'll hand the call over to Les.

Great. Thank you, Mark.

Good afternoon, everyone, and welcome to Alphatec Spine's conference call to discuss our third quarter financial operating results. Before I begin with my remarks on the quarter, on behalf of all Alphatec Spine employees worldwide, I would like to extend our most sincere thoughts to our many friends whose lives have been so disrupted by Hurricane Sandy.

As we discussed in our press release and conference call on October 22, 2012, the spine market remains challenging and does continue to impact our results. Mike will go over this in more detail shortly when he reviews the Q3 financial results.

I remain very excited and confident about the future of Alphatec Spine and our ability to re-accelerate revenue growth for the company. As I promised, I have put in place a solid plan to reposition the company as a market-driven, customer-focused organization on growing sales and profitability in the US and internationally.

Our initiatives are in place and I feel that we have laid the groundwork for improved revenue performance in the future. I am also pleased to have a seasoned spine sales and marketing veteran join me, Tom McLeer, who just recently joined Alphatec and he will be leading our US commercial operations.

As I have highlighted, our strategy includes accelerating Alphatec's introduction of new and innovative products that add value to the spine surgeon, hospitals and patient. We are delivering new products through internal development and licensing opportunities.

We are expanding our global distribution network with experienced distributors worldwide. We are growing our customer base's spine surgeons, hence the Phygen acquisition.

And finally, we are supporting our sales initiatives from the operational side of our business, with continuous ongoing improvements to our process that reduce cost, improve gross margin and quality.

With respect to new products, we have launched 2 in the past few months and a third is waiting FDA marketing clearance. In August, we launched our new spinous process fixation System, which is called BridgePoint.

It's a new minimally invasive surgical device designed to enable spine surgeons to immobilize and stabilize spinal segments without the need for pedicle screws and rod constructs.

We also launched our new synthetic bone growth biologic, which we've called Alphatec NEXoss, a patented product for use in spinal fusion. Lastly, we are currently awaiting the FDA market clearance, which we expect soon, on a third product that is an anchored, zero-profile, fully retractable cervical interbody device, which we've called Insyde [ph].

This product fills a gap in our cervical portfolio for an anchored solution. Last week, we announced that we've entered into an exclusive worldwide supply agreement for Insyde [ph] and we will launch this product as soon as it's cleared by the FDA.

With respect to new customers, the closing of Phygen LLC, right, is imminent and, hopefully, will be announced shortly. This will be a transformational event for Alphatec Spine.

The Phygen transaction should provide us with access to a network of over 100 leading US spine surgeons who formed Phygen out of a desire to deliver cost-effective products and improve treatment outcomes for spinal disorders through surgeon-inspired technology.

In addition to new distribution partners and surgeon customers, the acquisition provides us with several new products and associated technologies. A very exciting one of these is the Leucadia AutoLok pedicle screw system.

The Leucadia AutoLok system is a patent pending device that incorporates a unique set screw that anchors the rod to the pedicle screw through a series of locking lobes. This locking mechanism is designed to prevent set screw from backing out and compromising the construct strength.

The product was launched back in August and a number of cases have already been performed. This system was developed by Phygen based on the feedback from its final surgeon members, with a focus on reliability, safety, ease of use, flexibility and simplicity.

The acquisition also enables Alphatec to collaboratively tap into the collective medical knowledge of the Phygen Scientific Advisory Board, which we feel will enhance our product innovation, product refinement capabilities and help advance the standard of patient care in the evolving spine industry.

Together, our 2 companies share complementary cultures, product portfolio and distribution networks, and this represents a great opportunity for Alphatec and Phygen to offer their products in parallel to their sets of customers.

We continue to believe that in 2013, the Phygen business will generate approximately $15 million in revenues and be accretive to earnings. 2 weeks ago, we filed a Form 8-K describing the details of this transaction and, obviously, that's available for you to read at your leisure.

Our sales productivity initiatives are supported by the operational side of our business through ongoing improvements to our processes that are designed to reduce cost, improve gross margin and quality. We have made significant progress in Q3 to further implement lean practices throughout our US supply chain.

We have also added a second automated milling machine to support the growing demand for Trestle Luxe. This will further reduce the manufacturing cost of this product.

The validation of this machine should be completed during the first quarter of 2013.

For those of you who were not able to attend the North American Spine Society meeting in Dallas, I wanted to point out that we had an extremely productive meeting. We hosted a number of product demonstrations and sawbone labs in our booth that attracted many surgeons and distributors interested in learning more about our product portfolio and our marketing strategies.

Booth traffic was excellent and we created quite a buzz with our new focus products, including BridgePoint, Trestle Luxe and Alphatec NEXoss. We are especially pleased -- we were especially pleased to see so many Phygen surgeons visit our booth to review our product lines, while we also had an opportunity to display their products on our booth as well.

We also had our new anchored, zero-profile, cervical body device, Insyde [ph] in our booth for demonstration, and we were quite pleased with how well this product was received by the surgeons that came by the booth. The market for the cervical interbody device is estimated to be around $465 million.

With the anchored interbody device component of that market, which is the fastest growing segment we believe, is currently estimated to be approximately $47 million.

Finally, on NASS, I would like to extend my sincerest thanks to the entire Alphatec team that helped organize our meeting in Dallas and they did make it a great success for the company. Thank you.

I expect the company to continue to achieve quarterly progress with the initiatives to scale Alphatec's business through a continuous flow of new products, stronger global distribution network, the larger customer base that comes with the Phygen acquisition, and then we will also continue to add new products through acquisitions, license and supply agreements. We are building a new and stronger foundation that should strengthen the future revenue growth and lower our cost structure.

With that, I'll now turn the call over to Mike for a discussion of the third quarter results.

Thank you, Les. The following remarks are related to our reported operating performance for the quarter ended September 30, 2012.

As Les mentioned and similar to the first half of 2012, our Q3 results continue to be challenged by ongoing headwinds in the spine market. Q3 was further impacted by unfavorable changes in foreign exchange rates.

Our third quarter sales reflect these conditions, with global net revenues totaling $46.8 million, down 1.6% compared to the $47.6 million in the third quarter of 2011. On a constant currency basis, revenues in the third quarter of 2012 were $47.8 million or, essentially, even with the third quarter of 2011.

US net revenues totaled $31 million and were driven by continued growth within our biologics portfolio, which again achieved strong year-over-year and sequential quarter growths. International net revenues totaled $15.9 million and were up approximately 6.1% compared to the third quarter of 2011, driven by continued strong sales growth in Japan and improved sales in Europe.

On a constant currency basis, Q3 '12 international sales were $16.8 million, up approximately 12.3% compared to Q3 '11.

Gross profit for Q3 2012 was $29.6 million or 63.3% of revenue compared to the $30.2 million or 63.4% of revenue in Q3 2011. Gross profit and gross margin were impacted by approximately $1 million in intangible asset amortization associated with the Cross Medical settlement discussed below.

The Cross Medical settlement offset an increase in gross profit of approximately $4 million related to adjustments to sales milestone accruals for certain products. Net of these adjustments, overall gross margin would have been 64.6%.

As we will highlight each quarter, we announced on January 5, 2012 that the company reached a global settlement agreement with Cross Medical Products regarding a license agreement dispute initiated by Cross Medical and a patent infringement dispute initiated by us. As part of the settlement, we agreed to pay Cross Medical $18 million and we made an initial payment of $5 million in January 2012.

In addition to the initial payment, we will make 13 payments of $1 million per quarter thereafter, starting August 1, 2012.

From a P&L perspective, 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 2012 and the first 3 quarters of 2013, plus imputed interest of $200,000.

A noncash charge of approximately $1 million per quarter of intangible asset amortization will be reflected in cost of goods sold. However, these amounts will be added back as part of our adjusted EBITDA calculation.

US gross margins for Q3 2012 were 68.9% versus 68.1% reported in Q3 of 2011. When adjusted for the amortization impact of the Cross Medical settlement and the adjustments related to revised sales milestone accruals, US gross margins would have been 71%.

Given the performance of our core implant business, relative to the growth of biologics, the underlying gross margin in the US is clearly benefiting from the cost reduction and lean process improvement activities that we initiated earlier in the year.

International gross margin was 52.2% for Q3 2012 versus 53.3% in Q3 of 2011, reflecting the continuing positive performance of Japan, offset by lower margins throughout the rest of the world, driven principally by the mix within geographic regions. Given the nature of our international distributor business, quarter-to-quarter fluctuation between regions and product mix do influence the overall gross margin profile of the business.

The performance in Japan continues to be impressive in light of the reimbursement rate cap that was imposed in early April of 2012.

Total operating expenses for Q3 2012 were $31.6 million, a decrease of approximately $1 million compared to prior year of $32.6 million and were primarily attributable to lower sales and marketing and R&D expenses offset by higher G&A and severance expenses. Excluding both severance and transaction-related expenses, our operating expenses were $30.5 million.

GAAP net loss in the third quarter of 2012 was $2.5 million or negative $0.03 per share, compared to a net loss of $1.3 million or negative $0.01 per share for the third quarter of 2011. The difference in GAAP EPS is primarily driven by changes in the tax provisions between entities from period to period and is not a function of the underlying performance of the business.

Adjusted EBITDA in the third quarter of 2012 was $6 million, or 12.8% of revenues, compared to $3.5 million or 7.3% of revenues reported for the third quarter of 2011. Adjusted EBITDA represents net income or loss, excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other non-recurring items such as restructuring expenses, severance expense and transaction-related expenses.

Cash and cash equivalents were $25.9 million at September 30, 2012, representing a $5.3 million increase from the $20.7 million reported at December 31, 2011. The company's cash position at September 30, 2012 reflects payments totaling $6 million to Cross Medical into that 2012 as part of the settlement, offset by positive cash from operations and the benefit of our June refinancing with MidCap Financial.

As of September 30, 2012, our net inventory position was $48.3 million, an increase of approximately $1 million versus Q2 2012. Our net accounts receivable at the end of Q3 were $37.6 million, a decrease of $2.2 million or 5.6% as compared to Q3 2011, and a decrease of $1.2 million or 3.2% as compared to Q2 2012.

The decline in accounts receivable has been a function of our sales performance, coupled with continued diligence with respect to collections. Despite depressed economic conditions in certain parts of the world, we are not witnessing a major deterioration in our ability to collect our accounts receivable.

Similar to the first and second quarters of this year, our sales performance in the third quarter of 2012 reflects a challenging spine category. Continued improvements within our manufacturing operations, coupled with closer attention to resource allocation from operating expenses is demonstrating that we are strengthening and streamlining the operating structure of the company and, hence, the overall profitability of our business.

And now for our guidance for the remainder of 2012. With the first nine months of 2012 behind us and our year-to-date revenues totaling $143.5 million, we are faced with a continuing lack of fundamental improvement in the spine market.

This, coupled with some uncertainties in our business related to the impact of the Hurricane Sandy in the Northeastern United States, we expect to end 2012 with revenue in the range of $189 million to $193 million or minus 4% to minus 2% growth over 2011. Adjusted EBITDA will be in the range of $18 million to $20 million.

Please note that these guidance ranges do not reflect the impact of the acquisition of Phygen. Assuming that we close the transaction in the immediate near future, anticipated revenue for the remaining 2 months of the year is anticipated to be approximately $2 million, with no impact to adjusted EBITDA.

These estimates do not account for any additional transaction costs or adjustments associated with the purchase accounting of the acquisition, which will, of course, be backed out of EBITDA.

Now I'd like to turn the call back over to Les.

Thank you, Mike. For Alphatec Spine, our transformation into a market-driven, customer-focused organization continues to progress.

I believe that we are making solid progress to strengthen our future revenue growth and our operating performance.

We expect to continue to bring new and innovative products to the market. We expect to continue to increase our global reach by attracting new and more experienced distributors.

We expect to continue to attract new surgeons, hence the Phygen relationship. We expect to continue to focus on driving down costs through a diligent approach to the lean process.

I would like to thank all of the Alphatec Spine stakeholders and especially our employees who are persevering to make Alphatec a stronger company. Together, we are on a journey to unleash the value of Alphatec Spine for all stakeholders, while driving a world class experience for our customers as we move forward.

With that, Ashley, I'd like to open the call up to questions please.

First question is on the guidance and I think you went through some of this. I might have missed it, Mike, but if you're assuming $2 million in Q4 from Phygen and can you walk through the rest of the assumptions?

How much are you assuming from the hurricane to not present in your business in Q4 and we can obviously back into the rest of it from there?

Yes. So the guidance range explicitly excludes Phygen.

I just added the $2 million at the end. I think you can think of a guidance range at the top end of what I would characterize as the ongoing challenges within the spine category and, at the bottom end, some uncertainties and unknowns about just how much of impact from the storm that we're going to see in absolute terms versus volume that we may have lost and we'll get back at some point in time.

Okay. That's helpful.

And then on the competitive side, I think there's been a lot of a discussion throughout the industry and we certainly had these conversations at NASS. Can you talk about, number one, your business, your account base without Phygen?

How has that been compared to, say, the prior year, maybe the prior quarter? And then, the follow-on to that is how significantly does the Phygen account base increase your base Alphatec group?

So I think we talked about his on the previous call as well as variously throughout NASS. One of the things that we were concerned about coming out of Q3 is do we have a pricing issue, do we have a reimbursement issue, do we have a procedure-volume issue, did we have a market share issue?

And I think we've walked through the fact that pricing was not a significant issue for us. In our business, reimbursement wasn't a significant issue.

That doesn't mean to say that the category didn't experience it. And what we clearly saw was a procedure-volume challenge in September.

As it relates to the number of active physicians, a fair amount of due diligence has gone into the fact that we didn't lose a significant number of our physicians in September. What we saw was a reduction in the procedures they were performing in September versus August.

So I feel from a competitive set, I don't think we lost share. It was more of a procedure issue for us going in that month.

To the second part of your question, we have an active surgeon base that, say it's orders of magnitude, 225, 250 something like that. We look at surgeons acquired, new surgeons that are doing more business, as well as surgeons lost and surgeons doing less business.

We've been public that the Phygen opportunity represents a membership in excess of 100 spine surgeons. I don't think it would be fair or appropriate for us to say we expect to garner business from all of them, but clearly, it represents a significant upside potential in the surgeon base for the company.

Okay. That's great.

And then the last topic is on the profitability side of the equation. Maybe partially, Mike, maybe, Les, you can respond as well.

But just in terms of the absolute numbers that your implied adjusted EBITDA for Q4 is a sequential downtick despite a modest uptick in revenue at the midpoints of your guidance. So, Mike, what's going on there from a margin perspective?

And, Les, in your comments you talk cost; managing cost, reducing cost, et cetera. So just help us understand your directional strategy for cost reductions or the overall cost structure as we enter 2013.

And thank you.

Yes, so, I think for a couple of components of costs, I mean I think clearly, we were -- we took some benefit in Q3 that I don't necessarily anticipate occurring in Q4. At the lower end of the guidance range for Q4, despite what we accomplished in terms of EBITDA in Q3, we do have a volume impact in terms of the overall absorption of our fixed costs.

And likewise, our commission expenses were down in Q3 relative onto the top line. We're expecting a bit of a change there.

And also, we've seen the benefits of some reduced R&D expenses from the reduced programs, but we also have -- we've a fair amount of activity going on internally in R&D, as well as externally. So I think it's fair, it's a little conservative in terms of Q4, but we think it's appropriate in the circumstances.

Yes, and I think, Matt, to answer your question about the operational side of it, really Pat and his team have spent the last year really reinventing the supply chain from end to end; bringing new equipment in, getting some lean sales up and running. We've got some pilots going.

We would expect to see significant progress in our gross margin as we move through next year, as a result of these -- all the hard work that's come from the operational team this year.

So I have a question on your position on PODs, with respect to Physicians Owned Distributorships. Just wanted to get a sense of where -- you've talked about this a couple of times over the past couple of years.

Just give us a sense maybe of where it is that your exposure is today. In terms of a percent of your business, how that compares to the first half of this year; how that compares to this time last year; and maybe what do you see is changing there?

Is it your approach to those opportunities that's changed; is it the amount of demand that you get for hospitals and surgeons wanting to pursue those structures? Any kind color there would be helpful?

And then I have a follow-up.

Yes, absolutely. So, on a global basis, PODs make up less than 5% of our business and I kind of misspoke last time on the call.

I think I meant to say significantly less than 10%. So it's closer, on a global basis, to 5%.

We'd said it's less than 10%. We are not adding any large groups of PODs.

We have -- I think we've been clear that we've put a code of conduct together, together with our outside counsel, and if a POD fits into this code of conduct, we're happy to do business with them. If they don't, we don't do business with them.

We haven't seen a huge increase in demand to sign up new PODs. So I think it's kind of just wait and see what happens with the election and what position the government takes early next year on PODs I think is kind of where my mind is.

And, of course, as you know, Phygen, at a time, was a POD. It is no longer a POD now.

It is over 100 surgeons who invested in a POD actually sold their interest in the POD to us for mainly stock in the company. So it's no longer a POD and these doctors are just one of the hundreds of shareholders, thousands of shareholders we have, but hopefully, have an interest in the success of the company moving forward.

That's helpful. And then on -- a question of new products; on NEXoss and BridgePoint.

Maybe for NEXoss, if you could talk about what percentage of your business -- just so we can help think about layering this in to our model and what the opportunity is. What percentage of the biologic case revenue you're currently capturing with whatever, other bone graph products do you have in your bag; and maybe the degree to which NEXoss represents a shared opportunity or more of a mix opportunity going forward, in other words, converting your own business or capturing more share?

Any kind of similar commentary or color you can provide on BridgePoint would be helpful as well.

So, Matt, I'll try and deal with the biologics piece first. As you know, we don't disclose the size of our biologics business as a percentage of the U.S.

business or as a percentage of our global business. Frankly, I think if -- some of the prepared remarks and also, in some of our releases, it's obvious that our biologics business is growing quite well.

And we anticipate that to continue into '13. So we're looking at whether we want to change our disclosure practices going into the New Year, but for the remainder of 2012, we're not going to change it.

I do think that NEXoss represents a product for us that we didn't have in bag already. We now believe we have a pretty comprehensive suite of products in the biologics arena that allows us to go to market and complement our implant business.

So we clearly view it as a significant platform for the company. I really don't want to get into the is it modest, is it material, is it major.

We have reasonable expectation that NEXoss is going to contribute in 2013 more than just a rounding error problem as it were.

Yes, and I think the other thing that NEXoss brings us, it completed our biologic offering and, in fact, now, we're one of the only 2 or 3 or 4 our companies that actually have a complete offering of biologics. That's important because it helps us attract new distributors, competitive distributors that are displaced because of the full range of the biologic options that we now offer.

So I think you've got to look at the whole package. And as Mike said, we're looking for this to be a significant part of our growth in the future as well.

Onto BridgePoint, we launched it I want to say 2 months ago. We've done a number of cases which have all gone well.

So we have high hopes for that product continuing to grow. As with all these things, some smart surgeons have come back and offered us ways to improve it that we might be able to do multilevel treatments with it in the future.

So I think it's a great start and it's certainly going well.

I also think, Matt, one of the other aspects of this that I think is really a function of Les' leadership since he's got to the company is we had products that -- we were unable to get products out of our own internal development pipeline. And I think through the prioritization that we've put in place we've been able to focus on the here and now.

What can we get out, what can we get out quickly that's going to continue to support our business around the world and BridgePoint represents an opportunity for us to have some success with internal to develop the products. NEXoss was an example of an externally licensed product and I think that we'll continue to look at those internal and external opportunities as we grow the business.

And just not to push you on the disclosure on the biologics side, I appreciate where you're at on that at the moment. But do you think competitively that your biologics were in a position where they were preventing you from getting business, preventing you from winning accounts or surgeons and having this biologic helps flip that scale?

Or was it just that you weren't getting -- in the cases where you didn't have something like NEXoss, you just weren't getting that slice of the case revenue?

I think it's a combination. I think it benefits our existing distributorships, as well as attracting new distributorships when we have a full suite of products.

I think if we were missing something in the bag, so to speak, it represents an opportunity for a competitor to come in. And to the extent that we can limit access, I think it helps us drive more exclusivity with our existing businesses and we think that's a good thing.

Just 2 questions. One is, as you look at R&D, I know you kind of covered this, but just a clearer picture.

Is this kind of the new level that you've rationalized some of the programs or should we see that spend tick up nominally going forward?

I missed the first part of your question, Bill. Did you specifically mention R&D?

Yes.

Yes. So I think that, clearly, our R&D line has been impacted by the fact that we have streamlined some of the quantity of programs that we were working on.

In addition, I think that our -- another component of our R&D line was clinical trials, which we've not seen a significant uptick in spend. So we are at the lower end of our spend at this point in time.

And I think whether it's an internal spend or an external spend, I think that we will certainly be looking to continue to invest in the portfolio. So I think this was a bit of a function of where we have arrived from some of the decisions that we took earlier in the year.

I would expect the spend to tick upwards as we go forward.

A little.

Okay. And then also, I think you gave us some color as a lot of the supply chain changes that have been made over the past 12 months.

We'll see that contribution in 2013. Is that something we'd see more in the front half of the year, the back half of the year?

Kind of when do you it expect it to materialize? And as you've gone through this process, what type of gross margins domestically do you think you could ultimately see going out 2, 3 years?

So I think what you're going to see is what we see already happening. There's not going to be a step function change.

There's going to be iterative changes over time. So we see, in some of the underlying data, sequential improvement in terms of our underlying costs, and despite the fact that our revenue number was low for Q3.

So we are seeing that benefit. I'm going to -- I would anticipate we're going to see that continuing quarter-by-quarter all through 2013.

And I think if you were to -- and I'll put a stake in the ground; if you were to say that subject to the mix between biologics and our implant business, because that does influence the profile, I don't see any reason why our core metal margins couldn't be in the mid-70s. And we're in low 70s right now.

So I think there's 300-plus basis points for us to improve.

This is Denis Kelleher, in for Josh. Just wondering whether you could shed some more light on your thoughts in the cervical market.

There have been a couple of recent FDA approvals and motion preservation. I guess we're wondering how you feel about your cervical product suite as it stands today, and are their gaps you're looking to fill going forward?

I mean I think the most obvious observation I would have is having launched Trestle Luxe this year, and we're continuing to see the uptick and adoption and acceptance of that product, we believe we have, from a cervical play perspective, a very significant offering in the marketplace. I think although, obviously, not launched, I think the zero-profile anchored cervical interbody, we believe was an opportunity for us to complement our portfolio.

And we've taken pretty significant action to bring that in. And we look forward to being able to selling that as soon as we have FDA approval in the U.S.

I think that overall, while we're always looking to upgrade this portfolio, I think we feel pretty good around the overall parameters of the cervical business. I think -- say this again, the Insyde [ph] addition is significant for us and we're going to continue to press forward with Trestle Luxe, which is clearly having some significant adoption in the U.S.

I would add to it. I was with a surgeon the other day talking about this and because of the changes in reimbursement, he said, "The easiest thing to do now is get FDA approval.

The hardest thing to do is find someone that'll pay for it." So I think these are some of the challenges that this new technology is going to face in the future.

Understood. And I guess just one quick follow up and not to press you on PODs but if in a situation where PODs were here to stay, would your strategy change at all and would you think you'd increase your usage of them?

If the government came out and gave some clear guidelines, we would obviously follow those guidelines. And look, we're in the business of supplying products to the health care system and if the government came out and said that this is okay to do it under these certain conditions, yes, we would absolutely follow those guidelines.

My first question is on the Phygen guidance you've given for 2013, roughly $15 million. I just wonder how much surgeon retention that assumes and maybe, predominantly, what efforts that you're going to make to try to retain surgeons?

Is it simply just their vested interest in Alphatec, the company?

Well, I don't want to get into too much detail, but of the -- over 100 surgeons that are actually members of the group, at the end of the day, there's a reasonably small number of them using the product today. I'm very comfortable about the retention of those because they really were the voice, if you like, and the effort to merge their business in with us and they're very excited about it and they look forward to participating in our future growth.

So how we are going to attract these surgeons? We're going to have a series of open houses where we're inviting these surgeons in over the next several weeks, where we will do a complete demonstration of our range of products.

But we also want them to understand that we've changed the company to a market-driven, physician-led organization and we care about what they say. We care about their input and where our development goes.

And a lot of companies aren't giving physicians that feeling today. So I think a combination of the fact they have an interest in seeing our company perform and our stock do well and the fact we're going to be a market-led, physician-led organization and listen to them.

We feel good that we have a process to attract a number of those physicians to come work with us.

Okay. And then in terms of 2012 for your guidance, a third of the fourth quarter is over and at the midpoint of your updated guidance, the implication is roughly flat revenue.

Is the read-through from that, that you haven't really seen any re-acceleration in volumes in October, early November relative to what you saw in the back half of Q3?

Yes, I think, obviously, we want try and steer clear from too much commentary in the middle of a quarter, but I think that what with NASS happening in October and, obviously, the early part of last week for October and the latter part of last week for November, I think it's fair to say that we don't know enough yet that we could give you a definitive answer that October was materially different than September. And I think what we tried to do in the guidance range is accommodate what we know and what we feel in terms of the category and the current trends and an element of unpredictability as it relates to the potential impact from last week into this week.

Okay. And then just one last clarification to an earlier question.

Did I hear you clearly that you said there was hurricane impact contemplated in your new guidance?

We -- the disruption to our business in the Northeastern United States is comprehended in our guidance.

Great. Thank you, Ashley.

And thanks, everyone, for joining us here today. And as usual, we look forward to updating you with the progress on our growth strategies when we have this call again next quarter; also, when, hopefully, the Phygen deal closes, shortly we will, obviously, get a press release and update you to that event as well.

So thank you, everybody.