New Credit Rating: NuVasive

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We are initiating our issuer credit rating for NuVasive NUVA at BBB-, reflecting its improving competitive position and cash flow trends. NuVasive’s Maximum Access Surgery platform offers a novel approach to spinal fusion surgeries with a lateral approach through the side and a cutting-edge visualization system that helps surgeons safely navigate around nerves. The firm’s system and implants enable a technique that helps surgeons reduce procedure time, minimize blood loss, and enable faster recoveries. The primary stakeholders in those benefits–hospitals, surgeons, and patients–are responding well to this new approach, so far. In fact, NuVasive has carved out a nice niche in spinal surgery against the odds since this niche is often characterized by the sticky spinal surgeon relationships with key suppliers. We think advantages associated with NuVasive’s systems will inspire loyalty in recently trained surgeons and help win over more surgeons going forward.

With these market trends, we have a positive outlook of NuVasive’s financial prospects. The firm recently started generating profits, and we expect the firm to end 2010 with more cash than debt on its balance sheet. Beyond that, we expect cash flows to continue growing and boosting its cash position. The firm’s outstanding debt is due in 2013, and while it stands a good chance of converting to equity prior to maturity, we think NuVasive will have more than enough cash to repay debtholders by that due date. Most of our concerns about NuVasive are long-term in nature. The firm targets the spinal fusion market, which could see a pullback in procedures in the long run as comparative effective initiatives gain steam, especially data comparing fusion to non-surgical therapies remains murky. Given these long-term concerns, we’d likely lower our rating if NuVasive chooses to load up on more and longer-term debt.

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