Con-fusion? Don't Worry NuVasive Has Your Back!

Chance favors the prepared mind. Bottom line: NuVasive is prepared … for now and the future. So buckle-up and prepare for a fast-paced trip into the high-growth spine market. Here’s the agenda: First, we explore NuVasive’s powerful MAS platform. Second, we dissect NuVasive’s product portfolio to see if it “fuses” with trends in spine surgery. Last, we’ll examine how Nuvasive’s equity has been performing.

NuVasive’s MAS Platform

The Maximum Access Surgery (MAS) platform contains three components: NeuroVision, MaXcess, and specialized implants. These minimally disruptive spine applications have the potential to reduce surgery times, costs, lengths of stay, and recovery times. NuVasive’s platform caters to the lumbar fusion, cervical fusion, and decompression markets. NuVasive believes that increased use of implants, demand for minimally invasive alternatives, and favorable demographics will lead to growth. Below, we’ll find the bottom line with respect to NuVasive’s portfolio.

NeuroVision: This is a proprietary software-driven nerve avoidance system. NeuroVision can be linked to surgical instruments as well. The instruments are then connected to a computer system that provides real-time feedback during surgery.

Bottom line: NeuroVision should become standard operating procedure in spine surgery. It helps surgeons avoid critical nerves during surgery. The better question may be, “Why wouldn’t it be used?”

MaXcess: The MaXcess system consists of instrumentation and implants that provide minimal soft tissue disruption in spine surgery. This is NuVasive’s minimally invasive surgical system. NeuroVision is used with MaXcess.

Bottomline: In its simplest form, the system offers shorter operating time, shorter lengths of stay, and, according to management, meaningful cost savings.

Specialized implants: NuVasive provides implants to use with its MaXcess system.

Bottom line: These specialized implants enhance the applicability of the product—smart cross-selling by NuVasive.

Classic fusion: NuVasive has also entered the classic fusion market with a line of allograft implants, a titanium surgical mesh system, and cervical fusion plates, such as the SmartPlate Gradient.

Bottom line: Classic fusion is still the cash cow market. Stay in the game!

Biologics: Over the long term, it’s impossible to ignore the potential of biologics. Recently, NuVasive acquired Radius Medical, which makes Formagraft strips—bone graft substitutes.

Bottom line: Innovation drives the spine market. Biologics in 2007 and beyond could be analogous to the Internet in  the late 1990s.

Total disc replacement (TDR): NeoDisc is NuVasive’s first shot at the cervical total disc arthroplasty market. The second is called CerPass, also a cervical disc.

Bottom line: TDR is becoming an essential part of every spine company’s toolbox. Gotta have it! FDA approvals could drive new buying interest in Nuvasive’s stock. Clinical trials are underway.

Thoracic Spine Surgery: For NuVasive, Thoracic Is no Longer Jurassic

Thoracic spine surgery has traditionally been challenging for surgeons, and computer-guided endoscopic neurosurgery provides a way to meet this challenge. In a landmark article that appeared last year in US Neurological Disease, J. Patrick Johnson notes that thoracic spine surgery “often has both technical and anatomic challenges due to the need to intervene within the farthest reaches of the chest cavity.” Dr. Johnson adds that the challenge is even greater when it involves a location anterior to the spinal cord.

As we’ve said, NuVasive has your back! NuVasive will be expanding its MaXcess product line to include procedures on the thoracic spine. According to Wall Street analysts, the MaXcess Thoracic and XLP Thoracic should be released in late 3Q07. This product is flying below radar, but it could be well received by surgeons. Technological advances in thoracic spine surgery are ongoing, led by advances in computer-assisted image-guided surgery. NuVasive’s new product could be a welcome addition to the growing war chest of technology used to keep the thoracic from going Jurassic.

XLIF: Things could get extreme…
XLIF stands for extreme lateral interbody fusion, a minimally invasive surgical approach for anterior lumbar fusion. According to specialists at the La Jolla Spine Institute in California, the XLIF approach can be applied to treatment of spondylolisthesis, recurrent disc herniation, foraminal stenosis, degenerative disc disease, degenerative scoliosis, and pseudoarthrosis.

However, NuVasive may be even more ahead of the curve than we previously thought! XLIF puts NuVasive’s technology at the center of the artificial disc revision market. Many companies are seeking FDA approval for their TDR products, but NuVasive is moving ahead with technology for the inevitable revision surgeries that will follow implantation of TDRs. TDR is a new technology, and its long-term outcomes are not known. In a recent case report, Dr. Luiz Pimenta describes the application of this new approach in revision surgery: “Converting a failed TDR to an anterior interbody fusion

(ALIF) is especially difficult due to scar formation and elevated risk of vascular injury, and so posterior fusion and fixation is recommended as an alternative, leaving the original TDR device in the interbody space.” Although Dr. Pimenta says that solid fusion can be difficult to obtain when the TDR is left in the disc space, he nevertheless maintains that “the XLIF procedure is a safe and effective strategy for minimally disruptive TDR removal or revision.”

Cost Savings
“Show me the money!” exclaimed Jerry Maguire. NuVasive prefers “save me the money!” According to the PearlDiver Patient Records database, the average length of stay for patients undergoing posterior lumbar fusion who are admitted without complications or comorbidities (CC) is three days; patients admitted with complications or comorbidities average four days. Average charges in 2006 for patients admitted without CC were between $60K and $70K. Average charges in 2006 for patients admitted with CC could rise to $90,000. Recognizing that there is about a 30% difference between what a hospital charges and what a hospital receives from its insurance payers, It’s clearly time for a change.

NuVasive’s XLIF procedure may be the solution. NuVasive’s 10-K filed March 15, 2006, highlighted several encouraging findings with respect to NuVasive’s MAS platform:

• Procedures using the platform averaged about 70 minutes. In the past, they have averaged up to 180 minutes.
• Hospital stays have averaged one to two days following the procedure.
• Smaller incisions and less blood loss lead to less pain and shorter recovery times. In many cases, the patient is able to walk the same day.

Table 1: NuVasive’s Growing Product Portfolio

NuVasive’s product portfolio: Right industry, right time

NuVasive is in the right place at the right time. NuVasive’s primary product offerings have expanded beyond NeuroVision and MaXcess to include internal fixation, motion preservation, and biologics. In NuVasive’s 10-Q, filed August 8, 2007, the company noted the expansion of their current fusion product platform to include products designed to preserve spinal motion.

Wall Street analysts estimate the motion preservation market to be valued at $7.5 billion, with TDR representing $1.5 billion. NuVasive’s product offerings are some of the smartest ways we’ve seen for addressing this huge new spine market. Don’t think the cash-laden big boys aren’t watching!

Buy or Sell - NUVA?

In the movie Wall Street, an investor asks a broker “What’s looking good today?” The broker replies, “If I knew I wouldn’t be in this business!” NuVasive is on the cutting edge of spine technology, and this technology should benefit patients, hospitals, and surgeons. At present Wall Street’s analysts are giving NUVA 8 “Buy” recommendations (3 “Strong Buys”), 1 “Hold” and 1 “Sell”.

Wall Street is looking for 48% revenue growth this year, followed by 30% annual growth through 2010.  Wall Street expects this level of growth out of a small cap growth stock such as NuVasive, and we believe that it can deliver. In 2Q07, NuVasive’s revenues totaled $35.6 million, up 56.7% over 2Q06. Wall Street analysts project annual revenues surpassing $350 million by 2010. NuVasive’s CEO Alex Lukianov states, “Our strong second quarter results demonstrate the increasing effectiveness of our exclusive sales force and our initial success with the newly launched products.” He goes on to say that “initial surgeon demand for these products has been strong.” Key point! NuVasive has a six suite state of the art OR training facility for surgeons that exemplifies the company’s culture of “absolute responsiveness.” Think more surgeons are going to begin adopting this technology? You’d better believe it!

It all goes back to the fundamentals…

What about the fundamentalists and the balance sheet crowd? They’re always going on about ratios, debt, inventory problems, and cash flow. They’re a tough crowd for sure. Here’s the skinny: NuVasive has zero long-term debt, hence a long-term debt/total capital ratio of 0%. By the way, gross margins were 81.2% in 2Q07. In addition, the company has $44 million in cash and a current ratio of over 6 as of June 2007. That’s $6 of current assets per dollar of current liabilities. No liquidity issues here.

Wall Street has taken notice. The stock has climbed from $20 to over $30 a share in one year. The likes of Fidelity and T. Rowe Price have positions in the equity via their mutual fund families. The stock has jumped 50% over the past year. Is there more room to run?

Technically speaking

Let’s get…technical! Consider Chart 1. Although the stock was on an upward trajectory all year, the breakout was in June. Of the 50% gained this year, 35% has come since June on strong volume. The stock has traded above its 50- and 100-day moving averages all year and quickly bounced back after a brief decline in April. NuVasive could be overextended from its June base. Chart 1 uses a relative strength indicator (RSI). The RSI is predicated upon the theory that an advancing stock will close nearer to the highs of the day than the lows. The reverse is true if a stock is in decline. Basically, RSI is a momentum indicator that plots the stock’s price movements into a range. In the case below, the indicator hitting 80 would be a sell signal, suggesting that the stock may be overbought. However, if the indicator hits 20, that signals the message to buy the stock. Technical indicators can be used in fundamental analysis as well. As you can see, the indicator has hit 80 for NuVasive, mirroring the stock’s increased value in the current market.

THE bottom line is …

We like NuVasive.  Of course, behind every silver lining there is a cloud. In NuVasive’s case it is earnings, or lack thereof.  For the current year, Wall Street’s analysts are are forecasting that NuVasive will lose $0.35 per share.  The good news is that these same analysts are forecasting a profit of $0.15 per share in 2008.