NUVA

NuVasive, Inc. (NUVA)

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NuVasive (NUVA)

Q4 2012 Earnings Call

February 26, 2013 5:30 pm ET

Executives

Quentin Blackford

Alexis V. Lukianov - Chairman and Chief Executive Officer

Michael J. Lambert - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

William J. Plovanic - Canaccord Genuity, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

Richard Newitter - Leerink Swann LLC, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Greetings, and welcome to the NuVasive, Inc. Fourth Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to your host, Quentin Blackford, Senior Vice President, Finance and Treasury for NuVasive. Thank you. Mr. Blackford, you may begin.

Quentin Blackford

Thanks, operator. Welcome to NuVasive's Fourth Quarter 2012 Earnings Conference Call. NuVasive's senior management on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Michael Lambert, Executive Vice President and Chief Financial Officer.

During our management comments and responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements that involve risks, uncertainties, assumptions and other factors, which if they do not materialize or prove correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. These and other risks and uncertainties are more completely described in today's press release and NuVasive's most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission.

[Operator Instructions] With that, I would like to turn the call over to Alex.

Alexis V. Lukianov

Thank you, Quentin. Good afternoon. The fourth quarter of 2012 marks a strong close to a difficult year. We implemented a strategy to aggressively address market and competitive challenges that surfaced in the third quarter. And as our results demonstrate, we are well established on the path to rebuild sales momentum and maintain operating profit translation.

Revenue in the quarter was strong, growing 10% to $166 million. With the exception of our Impulse Monitoring service, every major product category accelerated in the fourth quarter to contribute to revenue outperformance. Capital and stocking sales to hospitals were down fractionally compared to last year, indicating solid organic procedural revenue growth driven by market share gains.

Operating profit translation was also strong. We generated a non-GAAP operating margin of 15%. For the full year, revenue grew 15% to $620 million, and we generated a non-GAAP operating margin of 14.5% in 2012.

Today, I'll provide an update of the spine market, address 2013 guidance and detail the drivers of NuVasive's strategy for market share growth and differentiation, which we believe will take us to $1 billion in revenue and beyond. I will start with a quick overview of the forces impacting market growth. First and foremost, the global shift for minimally invasive spine surgery and game-changing new technology will continue to provide a backdrop of growth for innovative spine companies. Minimally invasive solutions now represent close to an estimated 25% of the U.S. spine market. And we believe that as superior patient outcomes and clinical evidence continue to drive surgeon adoption, less invasive solutions will become the standard of care. Additionally, as new product approvals expand the options available to surgeons, new technology like cervical motion preserving devices are overcoming reimbursement hurdles and opening entirely new avenues of growth for the industry.

Nonetheless, insurer pushback and PODs continue to be formidable factors, and for the time being, are offsetting much of the U.S. market's growth. Surgeons continue to report insurer delays or outright denials of coverage for patients in need of spine fusion procedures, and surgeons are routinely experiencing pushback. While the impact of insurer pushback is unlikely to diminish for the foreseeable future, progress is being made to demonstrate the positive benefits of properly indicated spine surgery via clinical data.

As you know, we actively support surgeons to develop the Health Technology Assessment, or HTA, related to fusion and degenerative disc disease. The HTA is a collection of clinical evidence in support of spine fusion that surgeons and societies can use in dialogue with the insurers. The systematic review titled Lumbar Spine Fusion for Chronic Low Back Pain due to Degenerative Disc Disease was authored by Drs. Frank Phillips, Paul Slosar, Jim Youssef and Gunnar Andersson. It specifically focuses on the benefits of spine fusion for patients suffering from DDD. The paper has already been published and is available for download online. As well, it will appear in the April issue of Spine, a widely read peer-reviewed journal. This marks a giant step in the right direction and one that we've talked about now for the last couple of years. The next step is for the surgical societies to establish a set of clinically supported and consistent guidelines for spine fusion and then to encourage broad insurer adoption of those guidelines. That process has begun, but it is a lengthy undertaking involving multiple parties. It will take time, and we intend to continue to support its completion. We will also continue to do the utmost to ensure that surgeons are able to choose the best course of care for their patients versus actuaries or consulting firms using questionable clinical algorithms to improve insurance payor profitability.

Insurer pushback has created a difficult environment, incentivizing some surgeons to adopt POD models, which we estimate represent as much as 15% of the U.S. spine market. As the proliferation of PODs comes under increased scrutiny, leading hospitals are increasingly prohibiting POD-sourced products. We will continue to focus on educating doctors, hospitals, surgical societies and elected officials of the ethical issues at stake. We are raising awareness that PODs stifle research and development in the spine market in need of ongoing innovation and improved outcomes for even more surgical applications.

The challenging spine environment has also driven some of our competitors to adopt unsustainable tactics to poach our sales representatives. Those tactics negatively impacted our results in the third quarter. And in response, we acted quickly to implement solutions designed to rebuild sales momentum. The strength of our fourth quarter results gives us confidence in our ability to execute that strategy. And as we enter into 2013, we intend to sustain that momentum. The quality and pedigree of our new sales representatives is excellent.

We reengaged our sales force with improved mobile resources and new asset management programs that change the way we communicate within the field. Our sales representatives have been outfitted with iPads, complete with all of the tools they need to collaborate with each other, to access charge receipts and price lists to improve surgeon scheduling, to increase inventory turnover and to share case reviews. After the first PCM Cervical Disc case was completed, the sales representative was immediately able to share the experience of that case in a form that other representatives can easily access and share with their own surgeon customers through our mobility platform.

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