NuVasive Shares Plunge as Customers, Sales Defect to Competitors

   By Joseph Walker 
 

NuVasive Inc. (NUVA) lost a third of its market value Thursday after the maker of spinal products reduced its third-quarter revenue guidance because of customers and sales representatives defecting to smaller, lower-priced competitors.

The San Diego company lowered its top-line forecast by only 4.5%, but the reasons behind the cut hit several growing concerns among investors in larger medical device companies--such as the rise of physician-owned distributorships, which have pressured product prices; threats from smaller, more nimble device companies; and reimbursement pushback from insurers.

The result for NuVasive was a loss of customers, something that it saw happening in the second quarter.

"What happened in the third quarter is that it accelerated, and the account churn took place in a number of larger accounts that we lost, together with the reps," NuVasive Chief Executive Alex Lukianov said on the company's conference call Wednesday. "They're going to PODs, or really being taken out in terms of our ability to work with them through smaller, very aggressive companies."

Wall Street reacted harshly, recently sending shares plunging 33% to $15.22.

Revenue for the quarter will be $147 million, down from the $154.4 million the company had previously suggested. For the year, the company estimates lost revenue will add up to between $15 million and $25 million. Hardest hit were sales of NuVasive's core lumbar spinal fusion devices, which account for 60% of the company's revenues.

About half of the sales decline is driven by the increasing market share of PODs, which the company estimated now controls 15% of the U.S. market, up from 10% last year. PODs generally sell cheaper devices than market leaders like Medtronic Inc. (MDT) and NuVasive, and have been criticized for creating conflicts of interest for doctors who profit by selling the same devices that they recommend patients have surgically implanted.

Mr. Lukianov said some surgeon accounts--including one worth $6 million--were moving into PODs because of reimbursement pressures from insurers. "When a $6 million account moves into a POD, it's a real problem. And there's not much we can do to offset it," he said.

Sales also were hurt by the loss of sales representatives to smaller competitors poaching from NuVasive's force. NuVasive saw 14 reps leave the company since July 1, most of them lured to competitors by guaranteed salaries between $600,000 and $1 million, Mr. Lukianov said. However, NuVasive is unlikely to try to match those salary numbers, and the company expects the trend will diminish over time.

"We're not going to play that game. We're not going to do things of that sort that we think are absurd and ludicrous," Mr. Lukianov said. "But there's only so many $800,000 checks one can write, and so, I don't see that continuing on forever more."

Poaching is common in the industry, said Brean Capital Managing Director Jason Wittes, and NuVasive will continue to be vulnerable unless it raises the pay of its reps. In the low-growth spinal market, companies are forced to hire away proven sales reps to gain market share.

It's a reality that NuVasive knows well, having built up its business in the past by raiding the salesforces of bigger competitors like Medtronic, Mr. Wittes said. As NuVasive has become a larger player, it faces the same threats from smaller companies like Globus Medical Inc. (GMED) and Orthofix International N.V. (OFIX).

"The fundamentals for spine still stink," Mr. Wittes said. "If you're going to gain share, you gain it by stealing reps."

Mr. Lukianov said another challenge for NuVasive is the increased number of hurdles faced by surgeons in getting their device implant costs reimbursed by insurers, a trend that seemed to pick up in September. While the pushback didn't affect the third quarter miss, it is potentially worrying news for NuVasive and other industry players that have suffered in recent years from insurer resistance.

Not everyone is bearish Thursday on NuVasive. Canaccord Genuity maintained its buy rating, saying investors should buy the stock on weakness, though it lowered its price target to $21 from $27. In a note to investors, Canaccord cited upcoming events that could drive shares up, including expansion in Japan and expected Food and Drug Administration approval of a new cervical disc product.

Write to Joseph Walker at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires