The medical device industry faces an uncertain future with the newly imposed tax from Obama care. On Jan 1st, 2013, a 2.3% tax will be applied to all sales for medical device companies. Sales not profits will be taxed at a 2.3% rate, additionally companies will see an increase of 17% in FDA clearance fees. The industry has already been dealing with other issues such as a growing number of surgeons aligning with hospitals resulting in committees instead of surgeons deciding which products make the most economic sense and lower insurance reimbursements. Device companies must make critical decisions in order to absorb the new tax, at the same time working to address other challenges that face the industry. Some companies have been laying workers off, moving operations overseas, and cutting research budgets in anticipation of the new tax. One certainty is, companies who know their business and the marketplace will be best suited to overcome the changes and remain successful. Medtronic has already demonstrated to shareholders that they can and will absorb the additional tax in 2013. Other companies stand to take a bigger hit moving forward.
Nuvasive(NASDAQ:NUVA) is a medical device company with products focused on the spine. With the new tax, Nuvasive stands to lose 14 million in 2013. But that's not the only reason Nuvasive is in trouble. Companies like Nuvasive rely heavily on their customer base and sales force to use and promote products. Losing even a small number of accounts to the competition can have devastating effects on revenue. The same holds true for the sales reps that call on these accounts. Nuvasive has seen many of its top sales reps leave over the past year for other competitors. In fact the exodus was significant enough to prompt CEO, Alexis Lukianov to spend a good portion of Nuvasive's 3rd quarter earnings call on the issue. As stated by Alexis: "The decline in revenue was a result of aggressive competitive tactics targeting our sales force". He went on to say the company was accelerating the hiring process to make up for the loss of sales reps. He also stated the company made changes to better retain top talent. I'll discuss these changes later in the article. Next he discussed how surgeons were also being recruited by other companies with tactics that are not based on innovative products or responsive customer service. His solution was "Nuva touch" a program to ensure executive face time with their top 300 accounts. Nuva touch is not a new program for Nuvasive, Alexis stated that the program has separated Nuvasive from the competition for years. Obviously, the increased face time by Nuvasive execs is not working, as Surgeons are still leaving for greener pastures. Recently, Andrew Cappuccino, M.D., a world-renowned orthopedic surgeon based in Buffalo, filed a lawsuit in U.S. District Federal Court, Southern District of California, accusing NuVasive, Inc., of breach of contract. Cappuccino is owed $660,000 in royalty payments for an approved spine device he invested in. Dr Cappuccino was one of the Surgeons referenced as leaving the company for a competitor. Investors would be wise to take special note of this situation. Dr. Cappuccino is not just a run of the mill Spine surgeon. He attracted international attention in the medical and sports worlds as the orthopedic surgeon who treated Buffalo Bills football player Kevin Everett for his cervical spine injury suffered in a game in 2007. Dr. Cappuccino's use of induced hypothermia garnered world-wide headlines for the technique that likely staved off paralysis in the player. Simply put he is considered one of the best in the world at what he does and is respected by spine surgeons around the world. Nuvasive has admitted that the royalty payment is valid, however they claim to be holding payment for other reasons. If one were to connect the dots it appears that Nuvasive is withholding payments to Dr. cappuccino as a result of his departure from the company. Its important to remember that the spine surgeon community is a tight knit group and Cappucino is arguably the leader. This lawsuit will open the eyes of Surgeons around the world many of whom are currently doing business with Nuvasive.
As mentioned above, sales rep turnover at Nuvasive continues to be an issue. Having researched the device industry for years, sales rep turnover is not uncommon. Reps who are unsatisfied with their current employers leave for a variety of reasons. The practice is so common that most companies have their sales reps sign contracts which stop them from selling for another company for 1 year. Nuvasive claims its competitors used aggressive tactics to poach its sales reps. In what can only be described as an act of desperation the company slapped these reps and their new employers with lawsuits. The lawsuits claim reps violated their contracts and took business away from Nuvasive. The irony is, Nuvasive has been using the same "aggressive" tactics to recruit reps for years, and now like a baby who's lost his pacifier they are screaming and kicking in the form of lawsuits. In fact the CEO clearly contradicted himself during the question/answer portion of the earnings call. This question came just minutes after Lukianov's tirade about aggressive tactics and reps taking business with them after their departure.
Matthew Taylor - Barclays Capital - My first question is you said on lot of conference that you are going to gain some new accounts here. I'm wondering if that's because.
Alexis Lukianov - Chairman and CEO - We already have.
Matthew Taylor - Barclays Capital - Can you help me with the source of that, I mean how many new accounts coming with the reps you hired from some of these large competitors or are you now identifying new surgeons and haven't (inaudible) or surgeons coming back. So, any color around the confident that you have in these new accounts will be helpful
Alexis Lukianov - Chairman and CEO - It's a combination of all of those things but clearly they have an impact quickly and they are able to start to obtain sales faster than perhaps somebody without any experience.
How does Nuvasive plan to hire experienced reps that will have an immediate impact on business? What about the non-compete contracts? And isn't Nuvasive suing the reps that left, for taking important accounts to their new employers? Clearly the rules don't apply to Alexis Lukianov. Nuvasive is using the lawsuits as a scare tactic for its sales force, essentially saying, the company wants you to stay but if you leave we will attempt to destroy your lives. I have developed relationships with several key leaders at various companies. Most agree that Nuvasive is sending the wrong message to its employees and further turnover should be expected. I can safely say, the most talented reps in the industry will not leave their current situation for Nuvasive, considering the fact that any future moves away from the company will result in lawsuits. The truth of the matter is all of the recent departures from Nuvasive are due to reps getting tired of working for a broken mismanaged company. The reps that are being sued did nothing illegal and the lawsuits will be thrown out. In the meantime it's likely Nuvasive will continue to use them as a crutch.
Nuvasive has seen its share price drop 60% over the past 5 years . On October 3rd 2012, the company announced revenues for the third quarter would fall below previous estimates. The stock price sank 36% on the news. What's more troubling is the dramatic changes taking place from quarter to quarter. On the 2012, quarter 2 earnings call, Nuvasive raised full year guidance to $625 million up from $615 million. The theme of the call was positive and almost boastful at times. When asked about insurance payer push back, CFO Michael J Lambert said that the issue has been corrected and seems to be going away. On the 3rd quarter call mentioned above the theme was much different. The excuses were flying and the rosy picture the company had painted just 3 months prior was now a much different situation. The company blamed everyone for the collapse except for the senior leadership team. Additionally the insurance payer issue was now back in full swing and according to Nuvasive, having a major negative impact on revenues. Nuvasive once again changed their guidance, this time lowering it to $601-$606 million. The story got even more interesting when 3 months later Alexis announced that estimated full year revenue was $619 million. Miraculously the company found an additional $18 million in just 3 months.
These discrepancies should alarm investors because they show either some creative accounting or a serious lack of understanding the market place and business at Nuvasive. Either way I think Nuvasive is in for some challenging times ahead and see little upside for the company moving forward. My opinion is, until the leadership team gets organized and starts accepting responsibility for its failures I see no reason to invest in Nuvasive. This appears unlikely as long as Alexis Lukianov remains in charge. Shareholders are likely to grow tired of his cowboy antics as seen recently when speaking at the JP Morgan Health Conference. Lukianov shocked investors by calling the president a socialist during his presentation. I actually agree with him, but for a CEO of a multi-million dollar company to say it at an investors conference is absurd. Whether its a lack of intelligence or just plain arrogance, the comment showed how out of touch the CEO really is.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NUVA over the next 72 hours.