Even with Turmoil at Top, NuVasive Beat First-Quarter Expectations

Xconomy San Diego — 

San Diego spinal implant maker NuVasive (NASDAQ: NUVA) posted first-quarter financial results yesterday that exceeded analysts’ estimates for both revenue and earnings. But the first three months of 2015 also turned out to be an especially busy quarter for the company’s lawyers.

During an afternoon conference call with investors and analysts Monday, NuVasive chairman and interim CEO Greg Lucier said that during the quarter, NuVasive successfully overturned a $102 million jury award to Medtronic in a long-running patent infringement dispute. NuVasive also negotiated the resignation of longtime chairman and CEO Alex Lukianov (the company cited Lukianov’s violation of corporate expense reimbursement and personnel policies in a statement last month), and it reached a tentative agreement to end a government regulatory probe that has been hanging over the company since mid-2013.

That’s a lot of billable hours.

Nevertheless, Lucier said resolving the government inquiry and lowering the potential damage in the Medtronic case “removes a significant legal overhang for the company.”

Following a March 2 appellate court ruling in the patent infringement case, NuVasive said the dispute would return to federal district court to determine how much the $102 million award should be reduced. In anticipation of a favorable ruling, the company moved $56.4 million out of an accrual designated for the $102 million liability, NuVasive CFO Quentin Blackford said on the conference call. The company also took a one-time charge of $13.8 million under a tentative agreement to settle a two-year investigation by Office of Inspector General (OIG) of the U.S. Department of Health and Human Services.

As for the Lukianov matter, Lucier said an independent investigation overseen by NuVasive’s board “showed the activities in question were limited in scope and impact. In addition, we have not identified any significant internal control issues.”

NuVasive wrote off $3.4 million related to Lukianov’s departure during the first quarter, Blackford said.

“Although this transition was not planned in advance,” Lucier said on the conference call, “I want to be very clear that my early impressions as interim CEO are good. Nuvasive has been built into a tremendous company, one with a very bright future and game-changing technology, strong reputation in the spine market, and a talented leadership team in place.”

Some analysts nevertheless raised concerns about the unexpected departure of NuVasive’s chief operating officer Keith Valentine in January in a restructuring that incurred a one-time charge of $2 million charge in the first quarter. They asked whether the change in leadership would affect NuVasive’s internal corporate culture and prompt sales force turnover.

But Lucier maintained that NuVasive continues to operate a strong business, saying, “We haven’t seen any change in personnel turnover since these executive transitions were announced.”

Lucier said NuVasive also would hold fast to its overall core strategy, although he outlined three areas for improvement:

—While NuVasive has a sophisticated sales team, Lucier said, the company has an opportunity to become more sophisticated and adept at product manufacturing, and to improve its overall operational excellence. He wants to revamp NuVasive’s customer fulfillment practices and asset utilization, improve NuVasive’s supply chain, and to increase efficiencies in service and merchandising.

—NuVasive will stay the course in terms of its global expansion strategy, but Lucier said, “You’re going to see us get much more focused on key countries” such as China and Brazil. “We have the potential to grow two to three times the size we are today,” he said.

—Lucier also wants the company to build on its existing spinal surgery technologies, such as the recently announced Integrated Global Alignment platform, which is intended to make spinal alignment a new focus in spinal surgery.

In its first-quarter financial results, NuVasive reported earnings, adjusted for one-time costs and gains, of 30 cents a share, which topped Wall Street expectations. The average estimate of eight analysts surveyed by Zacks Investment Research was 21 cents per share.

NuVasive said first-quarter revenue amounted to $192.4 million, an 8.4 percent increase over the $177.5 million NuVasive posted in the first quarter of 2014. Seven analysts surveyed by Zacks had projected Q1 revenue would average $189.2 million.

“We are moving forward now, putting these personnel transitions behind us,” Lucier told analysts. “As you can see from our financial results and the reaffirmation of our guidance, the company couldn’t be in a stronger position.”