NuVasive: An Excellent Growth Story In Spine Surgery (NASDAQ:NUVA)

NuVasive (NASDAQ:NUVA) is a low-growth medical technology company. Its revenue is expected to grow at a CAGR of 5% in the long term (next five years). The company’s XLIF and ALIF spine surgery procedures and its technologically advanced surgical access instruments will drive its revenue growth sustainably in the years to come. I expect the company’s market share in the spine hardware market will gradually increase driven by its growth strategy based on its three fundamentals (which will be discussed later in this article). Long-term growth-oriented investors can buy the company’s shares during pullbacks to maximize their profit.

NuVasive is a leader in developing advanced spine hardware solutions and is focused on generating revenue and profitability growth primarily based on selling its different spine surgical products, which include technologically advanced spinal implants and surgical access instruments, fixation systems, and biologics. The company’s intraoperative neuromonitoring system is gaining gradual acceptance in the spine surgery marketplace. The company is changing the way through which spine surgery is performed globally.

Growth Drivers

XLIF Spine Surgery Procedure

NuVasive’s XLIF spine surgery procedure is its primary growth driver. XLIF stands for eXtreme Lateral Interbody Fusion. XLIF is a procedure used for the treatment of spinal disorders which helps in reducing back or leg pain in patients. The procedure involves accessing the spine from lateral position for surgery. NuVasive earns revenue from the procedure by selling the instruments that are needed to perform the procedure. The procedure competes against traditional open surgical procedures, in which frontal or back portions of patients are opened through large incisions in the patient’s abdomen or back. XLIF performs well in the competitive environment since it is less invasive, which leads to lesser blood loss and trauma compared to traditional open spine surgery procedures. XLIF provides better patient outcomes from clinical and operational angles. These are the reasons why XLIF enjoys rising demand in the spine surgery marketplace. I expect XLIF will continue to drive NuVasive’s revenue growth in a sustainable manner in the next three to five years.

ALIF Spine Surgery Procedure

NuVasive’s ALIF spine surgery procedure is the company’s other growth driver. ALIF stands for Anterior Lumbar Interbody Fusion, in which spinal fusion is performed to stabilize a painful motion segment in the lower back. This type of surgery is performed by opening the abdomen for accessing the frontal or anterior part of the spine for fixing the problems of the spine. Since ALIF leads to smaller abdominal incisions, it performs well in a competitive environment (traditional open surgical procedure). Traditional procedure generally involves opening the abdomen or back with a much wider incision. ALIF is a minimally invasive spine surgical procedure that results in less blood loss and trauma compared to traditional spine surgeries. NuVasive generates revenue from this procedure by selling surgical instruments necessary for this procedure. I believe NuVasive’s approach to performing ALIF is better than its competitors, as a result of which the company will be able to ensure long-term revenue growth that will sustain for a long time.

Competition

NuVasive conducts its business in an extremely competitive market environment. The company’s competitors include Medtronic (MDT), Johnson & Johnson (JNJ) owned DePuy Synthes, Stryker Corporation (SYK), Globus Medical (GMED), Zimmer Biomet Holdings (ZBH), Orthofix Medical (OFIX), and Alphatec Holdings (ATEC). NuVasive competes with these companies on the basis of quality of products offered, breadth of products offered, and price.

NuVasive’s XLIF spine surgery procedure, in which spine surgeons deploy modern surgical techniques, such as patient-specific rod bending, neuromonitoring, and smart imaging, is the company’s primary competitive advantage. XLIF is a modern spine surgery technique using which spine surgeons can change lives of patients suffering from back or leg pain in such a way that leads to expansion of the company’s long-term revenue growth in a significant way.

NuVasive’s other competitive advantage is that it enjoys leadership position in less invasive spine surgery, as a result of which it has resources for continuously developing enabling technologies for modern spine surgeries. Such surgeries help in improving clinical and operational outcomes of patients, which leads to long-term revenue growth for the company.

Third Quarter 2022 Financial Results

The company reported third quarter 2022 revenue of $295.3 million, an increase of 9.0% year-over-year on a reported basis, and a 12.9% increase on a constant currency basis year-over-year. The company’s non-GAAP net income came in at $28.3 million, or $0.54 per share, compared to non-GAAP net income of $16.9 million, or $0.32 per share in the year-ago period. Non-GAAP net income on per share basis increased 68.75% year-over-year, and net income increased 67.46% year-over-year.

The company reported excellent financial results for the third quarter of 2022. Top-line increased significantly driven by strategic investments the company has made in product and technology innovation which delivered continued above-market growth. Bottom-line increased driven by the company’s strong execution at product development level, and stringent cost control measures. I expect the company will deliver continued top-line and bottom-line growth in the years to come (next three to five years) due to strong demand for its XLIF and ALIF franchises which are considered game-changer technologies by spine surgeons.

NuVasive is delivering growth both at the revenue and profit levels driven by the company’s three fundamentals, which are delivering core growth, extending the company’s Pulse platform, and aggressively pursuing opportunities both inside and outside traditional spine. I believe the company’s C360, X360, and P360 surgical solutions will help the company achieve significant levels of advancement in the development of its intelligent surgery spine hardware technology. This, in turn, will help the company deliver significant revenue growth in the longer term.

Valuation

NuVasive’s peer group companies include Medtronic, Johnson & Johnson, Stryker Corporation, Globus Medical, and Zimmer Biomet Holdings.

	NUVA	MDT	JNJ	SYK	GMED	ZBH
P/E Non-GAAP (FY1)	19.36	14.70	17.67	26.45	36.35	18.54
Price/Sales (TTM)	1.72	3.36	4.86	5.11	7.46	3.36
Price/Cash Flow (TTM)	12.99	16.39	21.51	35.06	38.66	17.21

Click to enlarge

(Data Source: Seeking Alpha)

NuVasive is attractively valued compared to its peer group companies. The company has a balance sheet that consists of cash and equivalents of $237.5 million, and total debt of $1007.4 million. The company is indebted indeed. However, the company’s net leverage ratio is 3.51x, which is not alarming. The company is attractively valued since it is indebted, and its growth rate in CAGR terms is low. In the last five years, the company’s revenue has grown at a CAGR of 3.14%, which is not impressive. However, I expect revenue will grow at a CAGR of 5% in the next five years driven by its increasingly popular XLIF procedure, and its C360, X360, and P360 surgical solutions, which I expect will help the company become the top spine hardware provider in the world. As a result of which the company’s shares can rise significantly in the next five years. NuVasive’s shares can be bought during pullbacks in the stock market, which could happen as a result of weak macro conditions prevailing in the global economy.

Assuming the company’s revenue will grow at a CAGR of 5% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $1,198.6 million, and at a CAGR of 5% the company’s end-2027 revenue will be $1,530.00 million, or $29.35 per share. In the last one year, the company’s shares have traded between the price to sales multiples of 1.60x and 2.80x. I expect the company’s price to sales multiple will touch a high of around 3x in the next five years driven by the company’s highly advanced spine surgical methods, the adoption of which is still in its infancy stage with huge growth prospects. Applying a price to sales multiple of 3x on the company’s end-2027 revenue per share, I get the company’s end-2027 share price as $88.05.

Risks

The primary risk of NuVasive is that its XLIF procedure can create significant complications for patients in terms of multiple nerve injuries. If nerves get injured, patients could suffer from different health-related problems, which may not be conducive to their quality of life improvement, as expected. If the company fails to solve this problem connected with XLIF, its long-term revenue growth and profitability could be negatively impacted.

If NuVasive wants long-term success in terms of remaining the leader in minimally invasive spine surgery, it should be able to properly educate surgeons and hospitals regarding the benefits of using its products. The benefits could be as follows: enhanced safety in using the company’s products, advantages over competitors’ products and cost-effectiveness. However, if the company fails to educate surgeons and hospitals properly, its revenue growth and profitability could be negatively impacted.

Conclusion

NuVasive’s modern XLIF and ALIF spine surgery procedures have significant growth prospects since the market for these procedures is relatively new with minimal penetration. As a result, the company’s long-term revenue growth could exceed the estimate (regarding long-term revenue growth) as perceived by stock market experts. As a result of this, I believe the company’s stock will perform well in the stock market, and it’s a long-term “buy.”