You have to admire Alex Lukianov. After company executives at NuVasive, Inc. saw that third quarter sales were going to be disappointing, Lukianov, the company’s chairman and CEO, wasted no time in calling a hastily arranged conference call with Wall Street analysts on October 3 to give them the bad news.
The bad news was that sales came in at only $147 million instead of the $154 million, the company had told analysts to expect. While this was still a reported 11% growth over the previous year’s third quarter, it was a decline by about $7 million from this year’s second quarter. The subsequent pummeling in investor notes written by the analysts was followed by the company losing a third of its market value. Shares in the company fell 33% to $15.22.
“Poachers and PODs”
Company Chairman and CEO Alex Lukianov was clear. The results were directly and equally tied to poachers and PODs.
“We experienced an unexpected sequential decline in the third quarter due to unusually high account churn related primarily to the growth of surgeon participation in physician-owned distributorships [PODs] and to increasingly aggressive competitive tactics. As well, we heard from many surgeon customers of increased delays and denials from insurance payers.”
“We believe our ability to take market share with innovative procedural solutions and services remains strong. We are focused on addressing the new challenges, ” said Lukianov.
Pricing Pressure
In citing PODs and poachers as the reason for the sales results, Lukianov is describing what some are calling the “Era of the Big Price Squeeze.” Hospitals are demanding price cuts. PODs, which Lukianov estimates have risen to 15% of the market, are giving it to them. He estimates NuVasive has lost around $15 million to $25 million in annualized sales as customers defected to PODs and sales reps defected to competitors.
Lukianov said the company can handle the poaching, noting that there are only so many $800, 000 checks out there to poach sales people. He said smaller competitors were offering as high as $1 million to lure away reps and distributors. But PODs, he says, will require government action.
The one hour-plus conference call with analysts was unique in that there were few, if any questions about the spine market. The bulk of analyst’s questions were about the PODs and poachers and how the sales shortfall was impacted by each.
Increasing Insurance Push-Back
Not to be lost in Lukianov’s comments about sales numbers was his warning that surgeons are, anecdotally, experiencing increasing payment denials by insurers. He said surgeons who used to tell him that insurer push-back wasn’t hurting them, are now telling him new pressures are hitting them.
Lukianov said NuVasive was at the forefront in the last couple of years of helping surgeons deal with added payer barriers. Now, he says it seems the payers have figured out how to respond to surgeons’ responses. He did not attribute any of the company’s third quarter shortfall to insurer push-back. He added that increased reimbursement pressures could fuel more PODs, “as surgeons look for new sources of revenue.”
Revenue Catalysts
The message from analysts wasn’t all negative. Some agreed that the sales force will be stabilized and expect the PCM disc and the company’s Japanese expansion to drive better revenue growth in 2013.
The company specifically noted these catalysts for growth:
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Continued expansion internationally including entry into the Japan market;
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Potential approval of PCM, the company’s cervical TDR (total disc replacement) device for motion preservation;
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New launches and product highlights planned for the upcoming North American Spine Society (NASS) annual meeting; and
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Continued successful rollouts of its latest lumbar systems: Precept and MAS PLIF
Other companies will soon be releasing their third quarter results and the North American Spine Society is having its annual meeting in Dallas at the end of the month. We’ll see who else is losing business to PODs and if the DePuy/Synthes merger is sparking new competition for sales reps and distributors.
