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Did NuVasive Investors Miss the Writing on the Wall?

NuVasive’s recent management turnover is no coincidence, according to a short-seller report that accuses the company of using accounting tricks to mask its business decline.

When NuVasive shocked Wall Street in late July by announcing that two of its top executives were leaving the company, analysts ultimately concluded that the changes were unexpected but would not be all that disruptive to NuVasive’s day-to-day business. Now, a report from short-seller GlassHouse Research suggests there is more to the turnover than meets the eye.

GlassHouse said the abrupt departure of former Chief Operating Officer Jason Hannon and Chief Financial Officer Quentin Blackford indicates that the clock may be running out for NuVasive, and that the company has been fooling investors with accounting tricks.

“Our analysts do not believe in coincidences at this scale and, based on our own expertise, we believe this will turn out badly for all involved at NuVasive,” wrote the authors of the 42-page GlassHouse report.

The report accuses NuVasive of employing an “acquire-at-all-cost” strategy to achieve its $1 billion revenue goal for the year, and the researchers claim that this method will burn the company in the end. “Based on our own calculations, we believe that the core business is suffering greatly at [NuVasive] and is being masked by recent acquisitions,” the authors noted.

Earlier this month, the San Diego, CA-based company reported the acquisition of Vertera Spine, but financial terms were not disclosed. Vertera develops interbody implants for spinal fusion using porous polyetherketone technology. NuVasive said the acquisition reflects the company’s “continued commitment to pursue strategic opportunities as it builds out its advanced materials science portfolio.”

News of Hannon and Blackford’s sudden departure came just hours before NuVasive’s second-quarter earnings call. The company also revealed plans at that time to revamp its operating structure to improve product development and commercialization efforts, integrate U.S. and international sales, and drive operational efficiencies.

While analysts noted that the management changes were unexpected, the news didn’t seem to influence their views of NuVasive in a negative way. “While we are disappointed that Mr. Blackford is leaving, we do not believe this is a signal that [NuVasive] is losing momentum or that spinal market trends are deteriorating,” RBC Capital markets analyst Glenn Novarro noted in a July 27 research report. He added that NuVasive is expected to remain a share gainer in the global spine market.

The company reported mixed second-quarter results, growing constant-currency revenues by 11% year over year but missing Wall Street’s expectations by around $1.5 million, which was attributed to lower biologic and neuromonitoring sales.

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