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Why This Healthcare Innovator Sees a Brighter Future

By Dan Caplinger – Aug 3, 2018 at 11:45AM

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NuVasive is going through some growing pains, but the spinal surgical equipment maker has high hopes.

Advances in medical technology have greatly improved the quality of life for billions of people on the planet. One way in which healthcare has gotten better is in how new technology has reduced the extent to which invasive surgical procedures are necessary for treating common ailments. For instance, NuVasive (NUVA -2.41%) has worked hard to give spinal injury patients a way to have minimally disruptive procedures done to remedy their conditions. As the technology has caught on, NuVasive has seen demand for its systems emerge, and that's been a growth driver for the company.

Coming into Tuesday's second-quarter financial report, NuVasive investors had high hopes for the company, and the spinal surgery specialist delivered the news they wanted to hear. Even though some short-term pressures persist, NuVasive sees its current investments panning out well in the long run, and shareholders are increasingly optimistic about the company's prospects.

Multiple suites of surgical equipment, including surgical beds, imaging equipment, and various monitors.

Image source: NuVasive.

A nice rebound for NuVasive

NuVasive's second-quarter results showed some nice trends compared to past performance. Revenue growth accelerated to 8.5%, coming in at $281.6 million. The company returned to profitability on a GAAP basis, and adjusted net income of $30.3 million was higher by 28% from year-ago levels. NuVasive ended up posting earnings of $0.58 per share, matching the consensus forecast among those following the stock.

As we've seen in recent quarters, NuVasive was able to generate good results internationally. Revenue overseas was higher by 21% year over year, reflecting strength in nearly all of its international markets with the exception of the U.K. and Puerto Rico. More impressive was the fact that domestic revenue growth reemerged, with 6% gains for both the spinal hardware segment and the surgical support division. Surgical support sales gains were driven in part by the acquisition of SafePassage, but spinal hardware's success was almost entirely organic, driven by new product introductions and rising volumes of existing product sales.

Internally, NuVasive kept looking at moves to increase efficiency. Gross margin fell nearly 2 percentage points to 72.8% due to acquisitions and slower production at a key facility, but cuts in expenses were able to offset that drop and led to a modest rise in operating margin. Foreign-exchange issues weighed on NuVasive's results somewhat, but overall, the company was pleased with some of the favorable trends that it's seeing in the market.

What's next for NuVasive?

CEO Greg Lucier was happy with the progress that NuVasive has made. "We continue to see strong demand for new product introductions from late last year," Lucier said, "and positive surgeon conversion efforts as our new Lateral Single-Position Surgery procedure gains traction in the market." He also noted the key role international sales growth is having on the company's business scale.

NuVasive sees potential growth in a number of areas. 3D printing could create new avenues for sales in key areas, and ongoing new product introductions should continue to widen NuVasive's distribution channel. In particular, the NuVasive Specialized Orthopedics business has a lot of potential to improve profitability, especially as the West Carrollton facility ramps up its ability to produce more of the company's products in-house.

Some short-term factors led NuVasive to make minor changes to its guidance for the full year. 2018 revenue should still come in between $1.095 billion and $1.105 billion, but projections for adjusted earnings per share fell by $0.07 to a new range of $2.37 to $2.40. Those changes reflect higher costs for litigation settlements and fees related to consulting services NuVasive has used, but the surgical specialist thinks that those costs will be unimportant going forward.

NuVasive investors celebrated the news, and the stock soared 12% following the announcement. With new hopes for all the products in the company's pipeline, NuVasive has the potential to see growth accelerate if customers appreciate the technological advances that it continues to give them regularly.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends NuVasive. The Motley Fool has a disclosure policy.

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