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NuVasive: Tale of Two Markets
NuVasive, Inc. reported total revenue of $119.6 million for the second quarter of 2010. That's up 35.2% over last year and up 9.6% over the first quarter of the year. The company also updated 2010 financial guidance from previous guidance of $480 million to $500 million, to $485 to $500 million.
These are staggering numbers while larger competitors have reported virtually flat quarters.
Alex Lukianov, Chairman and Chief Executive Officer, said, "Our strong momentum driven by continued adoption of the XLIF technology and increased traction from our biologics and international areas gives us the confidence to increase guidance. We are keenly focused on being the most creative spine technology company in the world and achieving exceptional results through speed of innovation...as we drive towards $1 billion in revenue with increasing profitability."
NuVasive soars and exceeds expectations while competitors are grounded and struggle to meet their guidance numbers. How can that be?
Joanne Wuensch, BMO Capital Markets analyst, answered that question in a note to her clients on July 27.
Two Spine Markets
It appears there are two spine markets.” wrote Wuensch, "One where older legacy products are facing increasing pricing pressure and one where newer products addressing minimally disruptive solutions are tapping a $1.5 billion market increasing 20%-25% each year to reach $4 billion in the next five years and $10 billion in the next ten.
“In other words, 20% of the current fusion market is increasing rapidly (over time this should become 80% of the spine market) and NuVasive management intends to drive its MAS (XLIF), biologics, and motion preservation products to take share in it. Now, we believe that investors will doubt this, and question it, yet we have a hard time debating it given the results that the company just delivered."
Increasing Market Share
Wuensch says it looks like the NuVasive’s market share increased to 6.6% in the quarter from 6.1% in the first quarter and 5.4% last year. New products include the PCF cervical disc (the company has submitted its PMA application and approval is expected in 2011), Progentix (biologics, launch is expected in 2011), and NeoDisc (company is compiling data). The company is also expanding outside the U.S., where sales are expected to increase to 10% of revenue from 5% in the second quarter. “In other words,” said Wuensch, “there are levers to pull to deliver results.”
Sustainable Expectations?
In the "No good deed goes unpunished" category, Canaccord analyst William Plovanic warned investors that it will be tough for NuVasive to continue to dazzle investors.
He notes that the percentage of outperformance relative to expectations has been decreasing over the past year or so.
“Specifically, we believe the company is starting to reach somewhat of a critical mass with a broad product line, and therefore we expect future growth rates to correlate more closely with distribution growth rates. In addition, the spine market is experiencing significant pricing pressures, as reported by almost every player in the space.
“While the company continues to grow much faster than the overall market (4x according to management), we still believe the company will have difficulty maintaining +30% growth rate over the next 6-12 months,” concluded Plovanic.
With Medicare reporting that joint degeneration of the back was the fourth fastest growing clinical episode between 2002 and 2005, someone will fill the need. So far it looks like NuVasive.