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 Joseph.Walker@dowjones.com
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