It’s funny how decisions you once make may come back to haunt you.
That bitter medicine is what NuVasive (NASDAQ: NUVA), once an upstart in the medical world and maker of spinal products, and now a larger player, has been tasting.
Last week, investors punished the stock of the San Diego company, taking away a third of its value after it announced that it was lowering its third-quarter revenue guidance by 4.5 percent. The revised outlook was caused by a number of reasons, not the least of which was customers and sales force departures for lower-priced competitors. NuVasive CEO Alex Lukianov said that 14 reps left in July, lured away by guaranteed paychecks of $600,000 to $1 million, according to MarketWatch.
The funny thing is that NuVasive had built its own sales force a few years ago, in part, by raiding Medtronic employees, something that is well-known in the industry. Apparently, stealing employees of competitors who are attracted by higher pay is common practice.
Being on the receiving end of what NuVasive itself doled out to Medtronic, what is interesting now is that both Medtronic and NuVasive have a common enemy: PODs or physician-owned distributors.
“What happened in the third quarter is that [customer loss] accelerated, and the account churn took place in a number of larger accounts that we lost, together with the reps,” Lukianov said in the call. “They’re going to PODs, or really being taken out in terms of our ability to work with them through smaller, very aggressive companies.”
PODs are essentially small companies that make screws, nuts and bolts needed in spinal surgeries, but the twist is that they are owned by physicians or surgeons themselves. So, there is a certain conflict of interest in surgeons making money off not only on the procedures they perform but also by recommending products from businesses they own.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Back in February, this is how Medtronic CEO Omar Ishrak, responded to a question from an analyst about PODs, according to Seeking Alpha.
Well, look, first of all the PODs are still a small segment, a small portion of the overall revenue. Although clearly, they’re meaningfully affecting our overall share. Now if the POD gains — continues to gain critical mass and becomes bigger and bigger, then we’ve got to understand what that operating — that business model is and understand it more clearly, because right now, it’s coming under increasingly negative public scrutiny. We don’t think some of those practices are appropriate and, therefore, we don’t do such things. Now if it becomes really big, then that means that there’s some level of acceptance, in which case we need to re-examine our business model in that area and change our strategy. But clearly, if it gets really big, it’s something we have to pay attention to.
Lukianov estimates that PODS apparently own 15 percent market right now, a five percentage point increase from last year. Some like Gunter Wessels, partner and healthcare practice principal at TIGI Inc., said in an interview earlier this year that the Physician Payment Sunshine Act, whose implementation has been delayed, would likely bring further scrutiny on the existence of PODs. That is because the law will require public disclosure of how certain manufacturers pay physicians. Those vendors include pharmaceutical, medical device and biologics companies.
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