NuVasive Takes a Different Angle, Shakes Up Spinal Surgery Business
Writing about life sciences innovation around the country, I hear stories every day of companies that envision transforming medical standards of care through new drugs or devices. San Diego-based NuVasive is living the dream right now.
NuVasive (NASDAQ: NUVA), as its name suggests, has developed a less invasive way for surgeons to do spinal fusion surgeries. It was a bold and innovative idea when the company was founded in 1995, and when it first brought this system to the U.S. market more than five years ago. Now the leading edge is becoming mainstream as more doctors learn the procedure, and patients like basketball Hall of Famer Bill Walton share their NuVasive success stories. Not even hard questions from insurers who balked at paying the bills seem to have slowed the company’s success—or the growth of NuVasive’s shares on Wall Street.
More than 5 million Americans suffer from some form of chronic back pain, and that has created a spinal fusion surgery market worth an estimated $5.1 billion a year in the U.S. Big medical device players like Medtronic, Johnson & Johnson, and Synthes are leaders in this market with replacement disks, screws and rods that surgeons use to hold the vertebrae in place. But NuVasive has been grabbing market share, and boosting sales at a greater than 40 percent annual clip for years. The company expects to grow sales by more than 30 percent this year, on its way to estimated annual sales of as much as $500 million.
When a couple major private insurers, Aetna and UnitedHealth, publicly stated last year they wanted to see more evidence that the NuVasive system was as good as advertised, spinal surgeons and patients leapt to the company’s defense. The insurers backed off within six months and said they would go back to reimbursing the product. Walton, who suffered from excrutiating back pain for years, recently told a Union-Tribune sports columnist that “I’m getting back into the game of life,” after he had the NuVasive surgery done.
“At the end of the day, this is a higher efficacy procedure. We really have a better, faster, cheaper procedure for our patients, the people we serve,” says Michael Lambert, NuVasive’s chief financial officer.
I got an in-depth overview of the company, and the spinal market, from Lambert and Patrick Williams, the company’s vice president of finance and investor relations, when I visited their office in San Diego a couple weeks ago. What NuVasive does is really different from what its competitors have been offering surgeons and their patients.
The anatomy is quite interesting. Around age 30, people have the maximum amount of water in the intravertebral tissues, which work like shock absorbers in the spine, Lambert says. But that gradually goes downhill as we age. The space between vertebrae shrinks, nerves get pinched, and people feel serious pain.
Spinal fusion is one way to fix this structural problem. More than 80 percent of all spinal fusion procedures done today are performed when a surgeon cuts through the front, or the back of the patient, to stabilize and support the spine. That makes for an invasive and risky procedure in which doctors move organs, major blood vessels, and even the spinal cord to get to the vertebrae that needs repair, Lambert says. Depending on the procedure, a surgeon often must cut some major ligaments, or pieces of bone. Once the path is clear, a surgeon can slide replacement disks between the vertebrae, and to anchor them with screws and rods, which restores the natural space between vertebrae and helps relieve the pressure on pinched nerves.
The patient typically can expect to stay in the hospital three to five days, start walking again after two to four days, and return to normal activities in about six months.
The NuVasive approach is all about avoiding the front or the back with all those anatomical obstacles. Instead, the company’s technology allows a doctor get to the spine by instead going through the patient’s side.
Surgeons have wondered about that for a long time for obvious reasons. But it was never really done in a widespread way, because going in the through the side means navigating something called the Psoas muscle. That muscle conceals what’s called the lumbar plexus, a network of nerves. Surgeons wouldn’t dare do back surgery through this avenue before, because they couldn’t really see exactly where the nerves are, and if you cut through them, you’ll create major trouble.
“The patient would wake up in more pain than they were in before the surgery,” Williams says. And Lambert added, the nerve damage would potentially be permanent.
So NuVasive developed a way around this problem. This surgery system through the side, called XLIF, uses a dilator which spreads apart the psoas muscle without cutting into it, Lambert says. The probe has a sensor on the bottom which delivers an electrical impulse to where the nerves are. NuVasive’s proprietary software algorithm, NeuroVision, allows the surgeon to see where the nerves are in real-time so that he can avoid them on his way into the spine.
Once he or she has navigated through the Psoas and past the nerve bundle, the surgeon is staring at a nice wide channel to insert a big replacement disk, Lambert says. That’s important, because it allows the doctor to slide in a disk that provides better support than a smaller disk that’s made to fit through the avenues surgeons are used to navigating through the front or the back.
I asked these guys to show me hard data from a randomized clinical trial that says patients have better outcomes after surgeons use NuVasive products through this technique, compared to standard methods. The data that spinal surgeons have collected says that patients can leave the hospital in one or two days after an XLIF procedure, start walking the same day, and return to normal activities in four to six weeks.
Back in July 2006, NuVasive thought it had done what it needed to do by winning the blessing of the North American Spine Society, which declared this procedure should be reimbursed under existing codes that insurers use to keep track of reimbursable techniques. But as NuVasive’s technique started to catch on in popularity—alarm bells started going off at insurers. Cigna was the first to declare that NuVasive’s procedure was “investigational—” meaning unproven, and therefore not automatically subject to reimbursement. Humana followed suit, as did Aetna and UnitedHealth. Part of it was because the term for the procedure, XLIF, is a marketing term coined by NuVasive, not something in the medical literature, so insurers wondered why they were paying so much for this new thing, Williams says. They wanted to see evidence that the procedure was working, he says.
“The insurance company business model is to collect cash, sit on it, and get paid interest. If they don’t have to pay out money, that’s a good thing for them. Spine fusion is an expensive procedure, there’s no doubt about it,” Williams says. “As they start seeing a higher volume, and couple that a high payout per procedure, it starts to get their attention pretty quickly.”
With the help of spine surgeons and patient advocates, NuVasive was able to win over the people at Aetna and UnitedHealth to drop the “investigational” black mark from the XLIF procedure and return to business as usual. Those insurers are vital to NuVasive’s business, since most back surgery patients are between ages 45 and 60, and an estimated 60 percent get their procedures paid for by private insurance (another 20 percent are Medicare patients, and the rest are covered by worker’s compensation). So the news of Aetna and UnitedHealth’s reversal just two months ago on Feb. 26 sent NuVasive stock booming more than 34 percent, to $40 a share.
That might be good news for the company’s 800 employees and its shareholders in the short-term. But before I wanted to know what kind of long-term trajectory NuVasive faces. About 80 percent of that $5.1 billion U.S. spinal fusion market is still generated by more invasive surgeries that go through the front or the back, with just 20 percent of the market going to procedures through the side.
But side-entry procedures could make up 80 percent of the market in another five years, as more surgeons get trained on side-entry techniques. NuVasive is well-positioned as the dominant provider in that market segment, Williams says. The market as a whole is growing 10 percent annually, partly because of the aging baby boomer population. Even as competitors are racing to offer their own alternatives, to surgeons who the company has said its mission is to reach $1 billion in sales, Williams says.
“While Medtronic has had a lateral system for several years and Synthes has had a lateral system
for over a year, neither have seemed to slow NuVasive’s growth,” said Michael Matson, an analyst with Wells Fargo, in a note to clients March 18. “And we don’t see any reason that (Johnson & Johnson’s) DePuy will have more success against NuVasive than its peers.” He has a $45 to $50 price target range for the company.
With only about 6 to 7 percent of the current share of the market, NuVasive sees plenty of room for growth. Lambert notes that since we’re talking about something as risky as surgery, and surgeons need to learn a new way of doing things to adopt its product, it can take months for the company’s sales reps to win over a new doctor or advance into a new territory. But once a sales person has two years under their belt, they can reach full productivity, he says. Right now, about half of NuVasive’s sales force has less than two years of experience.
“We are still early in the game,” Lambert says. “It’s one of the exciting things. To be sitting here in the recession and for this company to have driven 40 percent growth, it’s astounding. It’s fun to be a part of.”