We're not getting any younger. That axiom can be said of people
in the United States and just about any other major economic power.
And as any physician will tell you, aging takes a toll on our
spines. Back pain problems tend to increase as we slow down, as
bones weaken and years of stress take their toll. But if you talk
to anyone who has had had back surgery, they'll tell you it's a
brutal experience. Surgeons take hours to carefully navigate around
nerves and other sensitive areas.
In response, San Diego-based
Nuvasive (Nasdaq: NUVA)
has come with a set of products to make back surgery a far less
onerous experience. Hundreds of new doctors are being trained on
the company's equipment every year, which is fueling white-hot
sales growth for the company. And we may only be in the middle
In conventional surgery, access to the spine is achieved by a large
incision to the front or the back of the body. Nuvasive's gear
allows doctors to make a less invasive incision in the side of the
body. The company's platform is called Maximum Access Spine (
), which provides surgeons with more than 50 tools to operate more
delicately and quickly. The platform's visualization systems avoid
nerve damage, access devices reduce trauma and cut operating times
by half and systems help patients retain a wide range of motion. In
addition, patient recovery times are faster, hospital stays are
shorter and the body suffers less blood loss and trauma.
All of those advantages have made the MAS an easy sell for doctors
and patients, enabling Nuvasive to steadily take market share .
Sales have risen at least +48% every year for the last seven years,
from less than $50 million in 2004 to $370 million last year. The
company believes it can approach $500 million in sales this year
and approach $1 billion in sales within the next five years. (The
entire spinal surgery market stood at $6.8 billion in 2009, and is
growing at a double-digit clip, according to the North American
The bullish forecast stems from a host of factors. For starters,
the company is still poised for further market share gains with the
MAS platform in the United States, as 400 new doctors are trained
on the system each year. Only 10% of all back surgeons have been
trained on the platform thus far. To train those physicians, the
company's exclusive sales force is expanding from 300 to 500. The
overall market opportunity should steadily expand as 13,000
Americans turn 60 every day for the next 20 years.
Nuvasive recently made a pair of acquisitions to bolster its
position in bone graft regeneration and in the field of cervical
disc replacement. The company is also rolling out new products
targeting specific back ailments like deformity and scoliosis.
Lastly, the company is just getting underway in the untapped
international market. International sales accounted for just 3% of
revenue in 2009, but with new offices opened in Germany, Australia,
the U.K. and elsewhere, that figure should rise to 10% to 15%
within a few years.
Shares of Nuvasive swooned this past winter when major insurers
classified the company's platform as "experimental" and thus not
eligible for reimbursement. But in early March,
Aetna (NYSE: AET
United HealthCare (
relented and began authorizing full reimbursement for most
procedures. That helped push shares back up, and the stock could
gain another lift if
also remove the "experimental" designation. The decision should be
a no-brainer, as Nuvasive's MAS platform is actually more
cost-effective than other approaches when hospital stays and other
factors are accounted for.
As is the case with many high-growth stocks, shares look expensive
based on current operating metrics, but attractive based on
longer-term metrics. For example, the P/E ratio on likely 2010
profits is about 35. But assuming the company can build revenue to
about $700 million by 2012, profits would likely exceed $3 a
share, implying a much more reasonable forward P/E of 14. Of
course, the days of +50% top-line growth are well behind, but +20%
annual sales growth and +30% to +40% annual profit growth appear
quite feasible during the next three to five years. In that light,
a P/E of 20 on projected 2012 profits yields a $60 target -- nearly
+50% above current levels.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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