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NuVasive Turns Q3 Profit

Third-quarter results for San Diego, Calif.-based NuVasive Inc. fell short of investor expectations.

Alex Lukianov, chairman and CEO of the spinal device maker cited “market challenges” as the reason for the drop in the quarter (ended Sept. 30).

Earlier this month, the company cut its revenue outlook by about $7 million, saying sales were hurt by increased discounts from competitors, coverage delays and denials from health insurers, and by increased customer turnover as more surgeons participated in physician-owned distributorships.

“We provided early warning of the shortfall and have implemented a plan to address the issues,” he said. “We are re-engaging with our sales force on a deeper level, accelerating the pace of sales force hiring to more than compensate for losses in the quarter, and increasing executive engagement with our top customers. Our market share taking strategy continues to be intact and we have a number of growth catalysts that will help drive growth for the balance of this year and beyond.We are in a unique position as the spine market continues to shift toward minimally invasive solutions and we intend to fully capitalize upon it."

The company struggled in the third quarter as smaller competitors poached more than a dozen of its sales representatives, taking some large customer accounts with them to their new employers. In addition, the company also lost market share to surgeons buying and selling their own medical device equipment, a growing trend that threatens to put more pricing pressure on the company.

NuVasive reported third-quarter 2012 revenue of $148.4 million, which is a 11.7 percent increase compared to the $132.9 million for the third quarter of 2011 and a 3.9 decrease compared to the $154.4 million reported for the second quarter 2012. NuVasive reported net income of $2.4 million, or 5 cents per share. A year ago, the company lost $67.6 million, or $1.69 per share, because of charges related to a legal liability and costs related to infrastructure expansion.

Total operating expenses for the third quarter 2012 were $98.1 million compared to $198.3 million in the third quarter 2011 and $104.9 million in the second quarter 2012. The lower operating expenses in the third quarter 2012 compared to the prior year were primarily attributable to a $101.2 million charge related to a litigation liability in the prior year.

Richard Newitter, an analyst with Leerink Swann, said initiatives to address sales rep hires could take time to pay off and are “unlikely to drive meaningful sales growth acceleration before mid- to late-2012.”

Company officials now expect adjusted net income of 88 to 90 cents per share in 2012, down from its previous estimate of about 97 cents per share. It cut its revenue estimate to $601 million to $606 million from $625 million

Analysts were expecting 93 cents per share and $612.8 million in revenue, on average.

"Revenue fell short of our expectations due to a heightened level of account churn," Lukianov said during an earnings call. "This was a result of both aggressive competitive tactics, targeting our sales force and surgeon customers and continued surgeon adoption of the physician-owned distributorship or POD model."

The rise of physician-owned distributorships also hurt sales as key customers in the Southern and Mid-Atlantic regions of the United States defected to the lower-priced device providers. PODs now account for 15 percent of the spinal market, Lukianov estimated, and have been criticized by legislators for selling products to hospitals that are used in surgeries they perform.

While PODs may not have harmed the broader spinal industry, Lukianov acknowledged, "the impact of PODs did abruptly affect our business."

The company said it is currently lobbying legislators, surgeon societies, and hospitals on the ethical issues in contracting with PODs in hopes that their use will be curtailed. Still, the company doesn't expect the upward trend to decline any time soon.

"Without intervention from hospitals, surgeon societies and government legislation, the impact of PODs could become greater," Lukianov told reporters. He added, however, "the likelihood of legislative guidelines in the near term is uncertain."

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