Alphatec Spine Moves to a More Fully Outsourced Manufacturing Model

During a recent conference call about the second-quarter performance of Alphatec Spine, company officials also discussed a move to change how the company manufactures its products.
 
Going forward, the company plans to strengthen its dependence on contract manufacturing partners to make its devices and related instruments, according to the company’s leadership. The move is part of a multi-tiered plan to increase sales, streamline operations and reduce costs.
 
The CEO of the Carlsbad, Calif.-based firm told participants on the call that the company was at the “tipping point” of its operational transformation, which includes goals of improving sales and profitability.  In part, to achieve its aims, the company is focusing on growing its sales force and strengthening its staff training and marketing efforts.
 
“[We are] putting our primary focus and attention in getting our commercial execution right,” said Chief Executive James Corbett. “It is designed to enable our future top-line growth.”
 
Almost 90 percent of U.S. surgeons did not have an Alphatec sales person assigned to them, according to Corbett.
 
“One of our model transformations is to change that reality and improve that market participation,” he said. “This has 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 first 40 markets covered.”
 
Part of the transformation includes manufacturing.

“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,” Corbett explained. “With that said, our cost to make and our cost to physically distribute 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.”
The company expects to be “fully outsourced” by the end of the year, he said. The change will mean a reduction of approximately 100 positions the company’s facility 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,” Corbett said. “We also recognize that this is a difficult time for affected employees and their families and we’re actively helping them with the transition.”

The company is no stranger to the outsourcing model. The company has “always outsourced” instrumentation, Corbett said.

“In fact, we’ve outsourced our implants and instruments from the beginning, so this is not new to us,” he said. “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.”

A company spokesperson confirmed for Orthopedic Design & Technology that “almost all of the outsourcing” would be done in the United States.
 
“We have always outsourced our instrumentation sets—the tool set that surgeons use to prep the bone and deploy the implants,” said Christine Zedelmayer, head of investor relations for Alphatec told ODT. “What we are doing now is transitioning the manufacturing of our implants—screws, plates, cages, PEEK (polyether ether ketone) inter-bodies, etc.—to outsourced partners. Many of these partners we have used in the past and have strong relationships with.” 

Zedelmayer stressed that the outsourcing is “in the context of us moving from an older product line to our new product platform, Arsenal. Our older product line was manufactured in-house previously. The development, scale-up and launch of Arsenal—instrument sets and implants—to date has been done by outsourced partners.”

The company’s Arsenal line of spinal fixation technology was cleared by the U.S. Food and Drug Administration in 2014, and following a limited release late last year, was fully launched in February. Most recently, on Sept. 17, the company launched its Arsenal Osteotomy Instrument Set, further expanding the Arsenal line.  The Arsenal Osteotomy Instrument Set is, according to the company, “a foundational component” supporting the Arsenal Deformity pipeline program that is targeted for beta launch in the first quarter of 2016. 

Corbett said that moving forward the company should experience “several” benefits from this transition.

The first is a reduction in capital expense “to the magnitude of tens of millions of dollars” in the next few years. Second, Corbett predicts a reduction in unit cost for implants, “which is what we manufactured internally in excess of double-digit reductions,” he said. Third, Alphatec will continue to focus on reducing instrumentation cost. The fourth is outsourcing of the company’s physical distribution model.

“Our goal is to increase set turns per month by nearly two times by the middle of next year,” Corbett said. “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. Through continued execution we believe we’ll be able to invest more in R&D, more in commercialization, and become a more competitive company.”