Lukianov’s Tipping Point
NuVasive reported a 27% increase in sales for the third quarter on October 28 after the markets closed.
The next morning the company’s stock dropped off the cliff, falling from $38 to $26 per share. Wall Street punished NuVasive for admitting to being surprised by how the last week of the quarter unfolded with cancelled surgeries. Analysts hate surprises.
Did something fundamentally change in NuVasive’s business model? Did payers decide to stop paying for the company’s XLIF procedure? Did the company’s irresistible march toward taking market share from its larger competitors stop?
Nope, none of that happened.
Company CEO Alexis Lukianov told analysts that simply put, insurers were pushing back on spine surgeries and scheduled surgeries were being cancelled during the quarter.
Specifically, Lukianov said the insurers were doing two things.
“First, they have increased the criteria necessary to preauthorize lumbar spine fusion surgery, and second, they have increased the level of scrutiny for the surgeries.
“The increased criteria leads insurers to deny coverage for fusion surgery if patients present without meeting each condition in the list of stringent indications such as, instability, neural compression or stenosis, and radicular leg pain. Each of these conditions must now be well documented.”
As an example, Lukianov noted many doctors’ offices are not in the habit of sending X-rays to document instability since it has never been previously mandated.
The result of the payers’ behavior, noted Lukianov, has been confusion and uncertainty in the marketplace, creating a significant overcorrection. An overcorrection he suggested amounted to roughly 10% to 20% of procedures being cancelled outright when degenerative disc disease is an indication. More on that in a minute.
Jefferies Research analyst Raj Denhoy put it simply: “A deteriorating spine market has caught up to NuVasive and the company lowered guidance.”
“Fusion simply cannot be postponed indefinitely, so we are hopeful that the impact of this increase back and forth between surgeons and insurers will be transitory.
NuVasive is not leaving this to chance. Lukianov bemoaned the lack of an industry response to this new insurer dynamic.
The company plans to lead the charge to improve coverage of spinal fusion through data from a pipeline of clinical trials as well as by marshaling the surgeon community to rally behind their patients and fight for coverage of spinal fusion.
Sadly, there is a lack of industry leadership in the spine market right now but we will gladly fill that void going forward. We are addressing insurer pushback head-on, much like we successfully did when XLIF was deemed by some payers as experimental.
“We are at the beginning stages of driving an advocacy effort that will better educate the payer and surgeon communities to the essential nature and improved outcomes made possible with fusion procedures as well as to the proper preparation of documentation to obtain preauthorization, ” promised Lukianov.
The company will try to “drive through some solutions” with payers as it did with XLIF as the company was able to unite all of the different players, “from surgeons to associations to payers. We’re looking to do the exact same thing right now again, and that’s a very big strategic undertaking and it’s one that we’ve already started, ” promised Lukianov.
Pushback Impact on NuVasive Guidance
Lukianov told analysts the pushback from insurers to surgeons is having a temporary impact on the company’s volume growth and visibility. “These dynamics led to lower-than-expected revenue in the third quarter and continues to challenge growth in the current quarter.” As a result, the company now expects full year 2010 revenue in the $470 million to $475 million range, down from the $485 million to $495 million range expected previously. Strategic investments into the growth drivers of the business will also result in lower than previously expected profitability.
“The market is exceptionally unpredictable right now and our 2011 expectations are 10%to 20% growth, which assumes that U.S. volume growth is in the process of bottoming. We have good visibility to growing our business at a baseline of 10%, largely attributable to the more predictable growth of our biologics, cervical, and international revenue. Upside to 10% growth will come from our U.S. lumbar product platforms as the market restabilizes.”
We are truly at the tipping point of the ship, from open to minimally disruptive spine surgery, and we are optimistic that expanded offerings in the category will only help to validate the market.
Analysts asked Lukianov if the 10% to 20% contraction of approved fusion surgeries might be permanent.
Lukianov said the company heard inklings of this contraction coming out of the summer. “We’re hearing a lot more of it throughout October. And, again, what I’m talking about is back pain alone without radicular symptoms. Our concern is that part of the spine market may be gone right now. We’re not sure exactly when that’s going to come back. We don’t know what happens to those patients that have just isolated back pain. Do they go on to a discectomy? Do they go on to a laminectomy? Do they end up having a fusion in six months or a year?"
Analysts asked Lukianov if the cancellations are for all back surgeries or just the 20% of those with back pain, (no leg pain, DDD) patients?
“Our best guess, ” said Lukianov, “is if you ask us what do we think is the percentage right now of patients that have isolated back pain and are receiving fusions, our guess is that number is somewhere in the 10% to 20% range.”
“Those patients are being outright denied. That [10%-20%] is absolutely out of the equation.” He believes those patients are not likely to get a fusion and that’s causing a spillover effect into other fusions and more stringent indications are being sought.
Permanent Market Contraction Possible
One analyst noted that the main reason insurance companies are pushing back on that 20% of cases is that the data for low back pain without radicular symptoms is “just not very good.” Could this 20% reduction be permanent?
“I think it’s a very real possibility, ” said Lukianov. “And just to be clear, though, we’re not trying to go out there and defend back pain in and of itself. If as much as 20% goes away, it goes away. That does not fundamentally change our outlook, our thesis, because we don’t think we’re getting—we’re getting next to none of that business today.”
Lukianov said while it’s certainly possible that a big part of the market could “absolutely” disappear, if somebody has legitimate back pain, the chances of them entering “the downward cascade that leads to fusion” may just be postponed. “It’s very unlikely that they would absolutely be able to avoid it. It just may mean that now they’re two years away or five years away. Or they have a discectomy or a laminectomy instead or they have nothing and just deal with the pain.”
The best way to look at NuVasive’s business right now, noted Lukianov, is that the lumbar business can be flat, but the other parts of their business will continue to grow at a much faster pace.
One analyst pointed out that NuVasive’s biologics and international businesses would have to grow by 30% and 70%, respectively, next year to allow the company to reach 10% growth even if the base business doesn’t grow.
Lukianov replied that he thinks NuVasive’s international sales will actually grow 100% next year and sees an upside in biologics with the Progentix product. “Even if, for some reason, that was delayed due to the FDA, we have tons of momentum going through right now with the Osteocel Plus going very, very well.”
He said Central and Latin America are opening up very well and sees a lot of upside in Europe. “Germany has been growing well, U.K. has been growing well…We see that really taking off. Next year, we start to get our first footstep into China. We start to see some early revenue coming out of Japan next year.
The company is on track to execute to a long-term goal of generating at least 10% of total revenue outside of the U.S.
Patent Protection Efforts
Other strategic initiatives noted by Lukianov were the company’s legal efforts to protect its intellectual property. “A few weeks ago, we initiated a patent infringement lawsuit against Globus Medical, which contends that Globus Medical’s LLIF lateral fusion offering infringes NuVasive’s XLIF intellectual property. We also initiated a dispute against Orthofix earlier in the year in defense of patents acquired in the Osteocel transaction.”
Lukianov’s Tipping Point
Lukianov concluded by acknowledging that, “This is a difficult time for NuVasive and the entire spine industry but we view the current conditions as an opportunity to advance our position in the market, expand our technological leadership, and garner more surgeon respect.”
He cited a peer-reviewed, published XLIF study that showed a nearly 10% hospital cost reduction using minimally disruptive spine surgery compared to open surgery in the perioperative period.
NuVasive’s leader did not back away from the goal of reaching $1 billion in sales with “500 photo-carrying representatives producing $2 million in average annualized sales.”
As Lukianov noted, the industry and science has reached a tipping point. And we might add, given the CEO’s offer to lead an industry advocacy effort, so has Alexis Lukianov.