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This is a spin-off from GreatBatch (GB) . It was spun off because GreatBatch wanted to be more focused on manufacturing other companies medical devices. Instead of their own.

 

This was spun off in March 14th in one week the company lost about 57% of it's market cap. I think it was because of forced selling from funds that didn't want to hold on to it anymore. Because it is a small cap company. Currently trading below net cash.

 

I am thinking why not buy below net cash because once the next quarters numbers are announced then the market will realize this company has money on the balance sheet. I think it will be re-rated.

 

The risks to this investment is the operating expenses. Because last year the expenses were $26 million with $75 million of cash on the balance sheet. They have only three years of operating expenses. They could rein in on those expenses. If they can increase their sales and EPS. I think this company could do very well. This is an early stage company btw.

 

So I am hoping the selloff was due to forced selling and not other factors.

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What is compensation like? Do insiders have skin in the game? How are their incentives? What about valuation - hopefully they have sales and not only expenses?

 

I bought a few shares for a speculative/monitor position. CEO owns 3% via RSU. However, he sold piece of the company back to GB around $15/share before the spinoff and cash injection, so theoretically it could worth about $22/share after GB put in $7.5/share cash.

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The revenue last year was $5 Million and Operating expenses was $26 million. If the company can increase sales and EPS. This stock worth more than $4.64 a share. And it has stop the cash burn because they have enough cash for about 3 years. Now they could cut reduce expenses. That would be nice. I am awaiting quarterly numbers.

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  • 2 weeks later...

If anyone is interested, I just completed a full investment write up:

http://stockspinoffinvesting.com/micrcap-stock-spinoff-trading-below-book-value/

 

Here's what I wrote regarding valuation.

 

Nuvectra Solvency

 

One of the conditions that needed to be met for Greatbatch to spinoff Nuvectra was the board of directors of Nuvectra had to receive an opinion from an independent valuation firm confirming the solvency acceptable to Greatbatch.  While this doesn’t give us a hard valuation number, it is nonetheless, reassuring.

 

Sale of Minority Interest in Nuvectra

 

Prior to the fourth quarter of 2015, Greatbatch owned 89% of Algostim and Pelvistim (Nuvectra’s two main products). In the fourth quarter of 2015, Greatbatch purchased the outstanding 11% of Algostim and Pelvistim for $16.7mm. This transaction values those two products at $152mm. Add $68mm of net cash and you have a total value of $214mm. This compares to a current market capitalization of Nuvectra of ~$70mm.

 

One other point regarding this purchase. Included in that $16.7mm was $6.9mm which was paid to Drees Holding, LLC, which is a limited liability company of the Nuvectra’s CEO Scott Drees. Drees had acquired his interest in Algostim and Pelvistim in connection with a long term consulting contract prior to him becoming CEO in July 2015.

 

A couple thoughts. I don’t know how Greatbatch got comfortable with the $152mm valuation. Because obviously there are conflicts of interest both perceived and perhaps real. I image Greatbatch’s board of directors got comfortable with the valuation by hiring a third party valuation firm. To cover their liabilities, I imagine they were conservative, but who knows.

 

Value of Intellectual Property Portfolio

 

In sum, Greatbatch has spent ~$125mm on Nuvectra which includes past R&D and acquisitions. As a result, Nuvectra has 107 U.S. patents (an additional 77 pending) and 49 foreign patents (an additional 43 pending). Add $68mm of net cash to that prior investment yields a total value of $193mm. This compares to the current market capitalization $70mm.

 

Piper Jaffray Price Target

 

Piper Jaffray has a $25 price target on NVTR. Here’s how Piper gets to its target:

 

“Our $25 price target is based on an enterprise value of 2.7x our FY 2018 revenue estimate of $78.3mm discounted one year at 10%, and assuming $88.7mm net cash and 11.1mm shares outstanding. We feel it is appropriate to value NVTR on 2018E revenue as it encompasses a more accurate portrayal of the enterprise by including revenue from the PelviStim SNS segment as well as allowing for value of a complete, maturing Alogovita SCS salesforce to be reflected.”

 

I also ran an EV/Sales and Price/Book comp analysis vs. med tech peers. Its available here:

http://stockspinoffinvesting.com/micrcap-stock-spinoff-trading-below-book-value/

 

Looks very cheap on both EV/Sales and Price/Book.

 

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I read the Form 10 on this some time ago so I'm a bit fuzzy on the details but what attracted me to the company was its small size (less followed, likely to be sold post spinoff, etc.), the initial sell off and the cash on balance sheet. After I read the Form 10, the feeling I got was this is not the type of spinoff Greenblatt references in his book because this company doesn't have an established business. There are no historical financials / revenue / EBITDA one can look to.

 

The cash on hand is going to be used to build a sales force and pay other operating expenses and will likely be depleted in a couple of years. As such, you basically have to be comfortable with the company's ability to execute its build-out and I found this particular risk very hard to handicap. Also, I believe the Form 10 mentions that the company competes with some giants that are well capitalized and this scared me away as well so I didn't bother spending much more time on it.

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  • 7 months later...

I wanted to restart this thread as the previous one on Nuvectra had gone a little stale.

 

Nuvectra is a med tech spinoff of Greatbatch, an outsourced med tech manufacturing firm.

 

Here is my investment thesis in a nutshell:

 

1. Nuvectra's management team is excellent (formerly at STJ, BSX and MDT) and heavily incentivized to make the stock work (10%+ of shares outstanding are reserved for management incentives).

 

2. Key product (Algovita) is off to a strong start with 105% quarter over quarter growth in most recent quarter. Numbers are small at this point, but it looks like Algovita is launching well. Importantly NVTR's sales force build out is on track. There are currently 42 sales reps who are fully trained and the company expects 50 by year end, 100 in 2017 and 225 in 2018.

 

3. NVTR has $65mm of net cash and a market cap of $60mm. Studies show that negative enterprise value stocks go on to generate very strong returns in the subsequent year. Usually negative enterprise value stocks are broken companies, but that is not the case here.

 

4. NVTR trades at a huge discount to peers on EV / Sales and Price / Book basis. If NVTR is able to execute its launch, the stock should be worth several multiples of its current price.

 

Full investment case here: http://stockspinoffinvesting.com/micrcap-stock-spinoff-trading-below-book-value/

 

Updated thoughts after most recent quarter here: http://stockspinoffinvesting.com/nuvectra-spinoff-updated-thoughts/

 

Thoughts?

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  • 4 weeks later...

wjsco, would be very curious to hear your thoughts on the stock...

 

Alright, here we go.

 

So, basically, this SCS platform has been under development for the better part of a decade. Greatbatch got a new CEO in 2006, who opted for a very interesting strat. His idea was to seed innovative medical devices, so that GB could supply all the components/device from the outset. The sales ramp for new devices can be awfully fast, and I guess GB wasn’t getting contracts to mfr stuff during the most lucrative phase of the product cycle.

 

So, they hired Scott Drees as an advisor, and then bought Quan Emertech. Quan had the base, non-rechargeable implantable device. They basically went on an acquisition spree from 2008-2014, buying lots of small companies for their tech. Quan was one (IPGs), Neuronexus was another (Leads), and CCC, too. I think CCC provided the rechargeable IPG tech, although I could be wrong.

 

So, Drees. He’s been in the industry for 30+ years. He was the #2 at ANS, which was sold for $1.3b in mid 2000s to STJ on ~$130m in sales. At ANS, he was the EVP of sales/marketing. To give you an idea of how important his position was, he was paid more than the CFO or any other c-suite exec except the CEO.

 

So they have the manufacturer (GB), they bought the technology (Quan, NeuroNexus, CCC), and they had their commercialization partner, Drees – as an experienced sales exec, Drees would be the one to launch the product (note: after spending 30 yrs in the industry, you can imagine that Drees’s physician network is fairly robust. And he brought in a bunch of sales execs from the previous ANS team, too, once NVTR was spun out). Then, they went and got a couple of physicians. And, they went and got the best two – one of them has performed more SCS implants than any other human being on the planet by a factor of 2, and the other was similarly pedigreed. You mentioned that GB bought out Drees’ minority interest. Interesting to note, though, is that Drees didn’t receive all the proceeds. Normally, when you have a clinician to help develop a product, you pay by the hour or something. Drees/GB decided to compensate these two with a stake in the companies (Algostim, Pelvistim – both now under the NVTR banner). So, interests were very much aligned. This is important b/c the clinicians are incentivized to give the very best advice, etc., and aren’t just collecting a pay check.

 

And there you have it. They have the manufacturer, the technology, the industry expert / salesman, and the clinician experts. And out of this, came Nuvectra. So that’s the background, now let’s go into products (next post).

 

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Right. So, if you couldn’t tell from the previous post, this whole effort was very intentional (starting with greatbatch ceo and scott drees), and they brought in a whole lot of firepower to make it happen. The result was, as far as I can tell, a truly revolutionary product. First I’ll discuss some issues that face current SCS products (Legacy Competitor Products, or “LCPs”), and then we’ll discuss NVTR’s product.

 

First, lead breakage and migration (cause complications in ~22% of pts). The lead is what’s connected to your spine, and it’s hooked up via a wire/tube (aka lead body) to the IPG, which provides the power. Basically, the lead body that LCPs used to connect the lead tip to the IPG isn’t flexible at all. It’s rigid. Now, the IPG the spherical/square/rectangular power device that is implanted inside the patient, and it’s fixed, doesn’t move from its position. The lead isn’t supposed to move either – it’s very difficult for docs to get the leads on the exact right spot  on the spine to mitigate pain, so it’s important that the lead stays where the doctor puts it. So you have a stationary IPG, an inflexible lead body, and lead tips that are secured to the spinal area with anchors. Now, reach down and touch your left toe with your right hand. What happens? The shape of your body changes. What happens with LCPs is that patients will move,  their body will change shape,  the lead body connecting A and B is inflexible, and the iPG is stationary….so, the lead tip moves or breaks. Something has to give, and it ends up being the lead – it’ll either break from the lead body, or will stay attached to the lead body, but shift as the lead body is pulled in one direction. Either is bad – the lead will no longer address the patients pain, and they have to come in for another surgery. So, the pt. is upset because their pain returned and the SCS isn’t working, and they have to go back under the knife. Doctor’s don’t like it for obvious reasons. Payers hate it because revision surgery is super expensive.  So lead breakage/migration is bad, and its especially bad when it happens during a trial, because a pt. is way less likely to opt into a permanent device if they had complications – this is one of the reasons the conversion rate from trial to permanent is so low, and also probably one of the reasons that the SCS Total Addressable Market is underpenetrated.

 

Second, ineffective pain relief. Only like 60% of pts who get SCS receive pain relief. Contributing to this is a number of things. First, it’s hard to place the leads in the exact right spot to make sure that pain relief occurs. Basically, there’s this thing called the epidural space in your spine, and that’s where the lead tip goes. But, LCP’s electrode arrays (or, lead tips) are fairly big relative to this space. The reason is impedance. The larger the geometric surface area of an electrode array, the less impedance, and the less power required to deliver pain relief. This is important because high battery-use intensity means constant recharging and/or a large battery, and patients don't like to recharge all the time and also don't want a huge device inside their body - they want it to be discreet. So, LCPs used larger lead tips to decrease battery usage intensity and decrease battery size/recharging rate. The problem, though, is that it’s really hard for doctors to steer the large lead tip into the epidural space. Second, the largest number of electrodes that LCPs could fit on a lead tip/electrode array is 8. Even Boston Scientific, with 32 independent power sources, actually just has 4 leads with 8 electrodes each. The issue is that the target area is 3 dermatomes,  T8-T10 (or d8-d10, cannot remember). A standard 8 electrode lead tip only covers  2 dermatomes, and an elongated 8 electrode lead will cover 3 but with worse coverage. So, the doctor has to choose between only covering 2 dermatomes with a standard lead (if he’s confident that pain isn’t originating from the 3rd dermatome),  or covering 3 with an elongated lead that’s not as effective.  Third, it’s difficult for doctors to determine the effectiveness of the implanted lead tips using LCPs. Traditionally, patients draw a 2d representation of where there back pain is on a piece of paper. The clinician then sets the electrodes, and asks the pt. if it’s covering the pain area. The pt, who’s under anesthesia, responds yes or no. It’s not effective because there’s no way to accurately map the pain and paresthesia overlay, and also difficult to get feedback from the pt. during the operation. A lot of LCPs were either acquired technology, or were built on the back of pacemaker technology, and as such it wasn’t a simple “let’s make this process more user friendly.”

 

That was a bit jumbled, but it does give you an idea of the kinds of issues that LCPs have. Lead tip breakage/migration and low trial-to-permanent conversion; ineffective pain relief due to poor placement of leads (b/c of large lead tip size for impedance), poor choices in lead selection (only cover 2 of 3 dermatomes, or cover 3 dermatomes less effectively), and inability to map/get pt feedback. This is why, for the most part, medical device manufacturers haven’t been able to increase penetration of the target market – because their products weren’t good enough. Next, I’ll walk through how Nuvectra’s product is different.

 

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So, now let's talk about Algovita, which is NVTR's SCS treatment.

 

First, lead tips. To refresh for you, the issue with lead tips is twofold: a) too big (bc of impedance issues) and cannot be steered effectively into epidural space, and b) only 8 electrodes per lead, which doesn't cover all 3 dermatomes effectively.

A) NVTR's lead tips use NeuroNexus thin film technology. They're much, much smaller than the competitors' leads. How can this be? Don’t they need to have a larger geometric area to decrease power usage? Not quite. In fact, Algovita’s IPG/battery is the smallest, thinnest on the market, despite having smaller leads. And it doesn’t require more frequent recharging. Algovita’s small leads are no small feat – this is a huge breakthrough.

 

So, turns out you don’t need larger geometric surface area to decrease impedance, you just need a large electrochemical surface area. And you can have a larger EC surface area without increasing your geometric surface area. So, to start, they use a deposition process to layer metal on top of a thin substrate (silicon, for example). Next, they use a second deposition process, or an etch process, to create a wavy pattern in the deposited metal substrate. Basically they’re creating mountains or valleys out of metal, to increase the surface area of the metal face without increasing its geometric size. But so far, this is easy – BSX, STJ, and MDT all have the ability to deposit metal on a substrate. They key is the 3rd step to the process. Basically, NVTR discovered monolayer polymer nanospheres Essentially, the nanospheres are microscopic spherical objects that are made out of polymers. What’s interesting here is “monolayer” – once deposited onto the metal, these nanospheres self assemble into a tightly packed, single layer formation – this is the breakthrough. The nanosphere layer that is deposited onto the metal is exactly one sphere thick. So picture a single layer of balls tightly packed together – there’s a negative space at each of the four corners of each nanosphere, where the spheres don’t touch.  And, this negative space is uniformly patterned across the metal layer, bc the nanospheres assemble into a tighly packed formation. From here, NVTR basically repeats step 2 – they either etch into the negative space using photolithography, or deposit metal into those spaces. I read the patent, and NVTR/GB mentioned that they’re able to increase the EC surface area by a factor of FOUR (4) using this nanotube technique. Essentially, after depositing/etching the first layers of metal mountains/valleys, they do it again at a much smaller scale with the nanosphere technique. To continue with the metaphor, you basically have larger mountains or valleys, that are then covered with much smaller mountains and valleys, and all made of metal. The key, I believe, is that the mountains/valleys  (large and small) must be precisely spaced in a uniform fashion. I don’t know whether it must be uniform in order to deliver lower impedance, or to ensure consistent delivery of the electricity, or what. And, to do the second set of nano mountains/valleys in a uniform fashion, you need something like the self-assembling nanotubes. So, this is their breakthrough, it’s patented, and the it’s important because it means smaller lead tips, and easier for clinicians to steer in the epidural space.

 

From the first paragraph, lets talk about b – LCPs can only fit 8 electrodes on a lead tip. The reason for this is because they can only fit 8 conductors in the lead body (1 electrode requires 1 conductor).  Basically, in LCPs, the 8 conductors are coiled within the lead body. You can’t go to twelve conductors, because the coil loses its flexibility and becomes even more rigid than it already is. Short and sweet, NVTR designed “coil-in-coil,” where they have a coil of 4 conductors surrounded by a second coil of 8 conductors. So, they get 12 conductors by nesting the two coils within eachother, because again, you can’t do 12 in a single coil. This, too, is big – not a single LCP has more than 8 electrodes on a lead tip (or 8 conductors in a lead body).

 

 

That covers lead tips. Now, lead body. Basically, with the lead body, there’s a tradeoff. You can either opt for flexibility/stretchability, or for tensile strength. Stretchability is much preferred, because it mitigates the problem of lead migration or breakage. If the lead body can stretch when the patient does, then there’s no pull exerted on the lead tip when the patient’s body changes shape (e.g., when you touch your left toe with right hand). Previously, I had mentioned how with the rigid lead body, if the patient’s body changes shape, something has to give, and it ends up being the lead tip. Well, with a stretchy lead body, the lead body is that which gives, not the lead tip. The issue, though, is that a flexible lead body is vulnerable to crushing, kinking, and other things that you don’t want happening. I was reading Medtronic’s patents, and they basically called out that these were the issues that they had when trying to develop a stretchy lead body. NVTR’s approach is pretty smart. So, we talked about the conductors being coiled within the lead body. This would typically be surrounded by a tube that protected the conductors.  LCPs manufacture their lead bodies/tubes to be rigid, because they can’t overcome the issues that crop up with stretchability. NVTR decided to add a new element to overcome the crushing/kinking/other tensile strength deficiencies associated with stretchy lead bodies. Basically, inbetween the plastic/silicon tube and the conductors of the lead body, they added a braided structure that’s fashioned in a tubular shape. The braids can be a hexagonal or other shape, but the point is that it is strong – it can’t be squished, crushed, kinked, etc.. The coil-in-coil conductor design and the braided tube can stretch, but the outer tube (which protects the braid, and prevents tissue from growing into the braid) doesn’t stretch longitudinally, although it obviously can bend, etc. The key is how they attach the braided tube and the outer tube to a) the electrode array/lead tip, and b) IPG. The out tuber is connected to the electrode array, but isn’t attached to the IPG. On the IPG side, the outer tube attaches to the braided tube at a point close to the IPG, but it’s not secured to the stationary IPG itself. Let’s say that the outer tube is 10 units long, with unit 1 being on the IPG side and unit 10 being on the lead tip/electrode side.  So, the tube takes up the space between unit 1 and 10. Let’s say the person stretches, and the coil-in-coil conductors and braid stretch with him. In the stretch position, the distance between the iPG and lead tip is now 11 units, with unit 1 being on the iPG side, and unit 11 being on the lead tip side. In this case, the outer tube, rather than stretching to be 11 units long, basically shifts down and covers units 2-11, and doesn’t cover unit 1 by the IPG.  And then when the patient snaps out of the stretch position, the unit distance comes back down to 1-10, and the tube covers all 10 units again. So the tube, rather than stretching longitudinally,  actually shifts longitudinally, in line with the degree to which the braid stretches (since, after all, the outer tube end near the IPG is connected to the braid, not the IPG). So this is huge. They have the only stretchable leads on the market. Their competitors have been trying to find out how to do stretchy leads while retaining tensile strength for some time, and have been unsuccessful.  NVTR has it.

 

Next, let’s talk about independent power sources. Of the LCPs, only BSX has a device with independent power sources (besides NVTR). Basically, remember the 8 electrodes per lead tip? Well, most of the competition can only supply one power setting to all 8 electrodes – so theyre either all on or all off, and if on, they all are on the same amplitude/frequency settings. NVTR, like BSX, has independent power sources. This means that each of their electrodes can be individually controlled. This means that each electrode can have a different frequency output or amplitude (strength), and individual ones can be turned off as desired. BSX and NVTR both have this capability, but something else about NVTR makes it’s offering superior. Remember the 8/12 electrode lead issue? BSX, like other LCPs, only can fit 8 electrodes per lead tip, and can’t fully cover all 3 dermatomes that are causing the issue. NVTR has 12 electrodes per lead tip, via coil-in-coil conductor design, which means that the doctor performs the exact same procedure on all patients – he doesn’t have to pick which two dermatomes he’s going to cover on a patient by patient basis, and doesn’t have to decide whether to use an elongated 8 electrode lead to cover all 3.  The 12 electrode lead gives full coverage of all 3 dermatomes. Once they’re placed, the doctor then uses NVTR’s clinician programmer to see which of the 12 electrodes are effectively mitigating pain – basically they deliver a charge to each individual electrode, and the pt. says whether it’s covering the pain area or not. If they discover that 4 of them aren’t needed, they can turn those 4 off, which saves POWER. So they fully cover all the potential pain sources by hitting all 3 dermatomes, and then they turn off the ones that aren’t needed to conserve power. And, they can change the frequency/strength of individual electrodes according to the pts needs. Let’s say that, despite the stretchy lead, that the patient does something that causes one of their leads to migrate/shift. Rather than perform a revision surgery, the doctor can activate other electrodes that are currently inactive, or can increase the strength or shape of closeby electrodes’ power output to cover the area that’s now not being covered due to migration (I think this is true, but not 100%). Alternatively, one thing about chronic back pain is that it’s dynamic – it moves. So if the patient’s pain develops in one direction or another, the doctor can respond by turning on/off, or adjusting the settings of, electrodes – without having to cut the patient back open. BSX has a similar capability, but they don’t have 12 electrode leads, which means that they might not have a (sufficient) physical electrode presence on the dermatome that’s now causing the patient trouble – e.g., it doesn’t matter whether they can turn on/off, bc they don’t have full coverage anyways. (also, BSX’s lead bodies aren’t stretchy, and the lead tips aren’t steerable, etc etc)

 

Couple of other small things: the iPG is the thinnest and smallest, which makes it more comfortable for the patient. The IPG also has the widest range of programming options – this means it can go from high frequency (buzzing feeling) to a low frequency (thumping feeling), or from high strength to low strength, depending on the patient’s needs, better than the LCPs. And the ASIC has additional functionality that hasn’t been marketed yet ‘(because they wanted to submit the simplest device they could for the pMA process). I think it has the capability to go to much higher frequencies than advertised (e.g., up to Nevro’s 10khz), they just haven’t requested approval for that functionality yet.

 

And, yeah – the lead tip is easy for doctors to steer and has the most coverage (12 electrodes), the lead body is flexible which means much fewer complications (and higher trial-to-perm conversion rate), the IPG has the widest range of programming settings, the clinician programmer has a state of the art 3D paresthesia/pain mapping functionality, and the patient gets a key fob that’s small and that lets them change settings on the go (and the IPG is the smallest/most discrete, which is more comfortable for patients, too).

 

So that wraps up Algovita. Algovita is super interesting, but you’ll notice that NVTR always talks about a “platform” in their filings, etc. My next post, I’ll discuss the benefits of this so-called platform (the benefits are absolutely gigantic – Algovita is awesome, but the platform is the pot of gold at the end of the rainbow), as well as some interesting things I’ve read about their upcoming product launches, JVs, etc.

 

One last thing that’s bugging me a lot. Nevro’s Sensa or whatever – ppl on VIC, etc, say that Sensa has a better product, and they say this like it’s clear that it is. But, Scott Drees did an interview with WSJ a couple of months ago, and he did not seem to think Sensa was a threat. He didn’t think BSX/SJT were big threats, either, which says something bc SJT owns ANS’s old tech; he really thinks MDT is the threat, and that’s probably because they[‘re a $100b company. I digress. So basically I saw Scott’s opinion of Sensa, and went and did some research, because I was also surprised – I had assumed the non-paresthesia associated with Sensa’s HF10 offering was superior, in part because of some articles/studies I’d read. Pretty sure that the articles/studies that are favorable to Sensa were sponsored by Sensa, so ruled that out as a legitimate source pretty quick. Anyways, upon cursory research, it became screamingly obvious that the VIC folks hadn’t visited SCS patient forums (by the way, this is one click away via google, so no excuse). Sensa does this new HF10 treatment. Basically, the electricity is delivered at such a high frequency that the pt doesn’t feel the vibration (paresthesia), but the corollary to this is that it is a monster power user. People on the SCS forums complain that a) the IPG is absolutely huge and has sharp angles, and the surgery recovery time can be several months due to the surgical pain associated with these dimensions, b) the battery, which is inside them, gets really, really hot when recharging, and c) it has to be recharged every day, which is terribly inconvenient (compared to twice per week). There are multiple stories about Nevro’s IPG cutting out through peoples’ stomachs from the inside because of its size and sharp corners. And yeah, battery gets hot, while it’s inside you. So, to do the HF10, Nevro basically had to use a much bigger battery and even then, still require charging on a daily basis. It is a novel approach, but the technology isn’t advanced enough, in my opinion. And also, Sensa and Algovita aren’t direct competitors – Sensa only gets prescribed in very specific situations. And ONE LAST THING! I mentioned that Algovita’s IPG had the ability to go to higher frequencies than advertised (advertised up to 5khz, I think it can go to 10khz+). Well guess what – in 2014, Greatbatch acquired CCC. And guess who supplies Nevro with IPGs for their HF10 treatment? CCC does. So Greatbatch now owns the company that Nevro was outsourcing it’s manufacturing to – they have the HF technology capability. And Scott Drees has said that they’re looking at which technologies to incorporate into Generation2 of Algovita – MRI compatibility, accelerometer (automatically change settings depending on pt. standing, sitting, or lying down – people become more sensitive to the stimulation depending on body position, so the accelerometer would recognize body position and automatically adjust the strength of the stim), burst stim technology, and, you guessed it, high frequency. So they have that HF technology – they’re waiting to see how it goes with Nevro before moving forward with anything, would be my guess.

 

 

 

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Thanks for sharing this. The dearth of followers for some names on this site is thin if not non-existent, but this is definitely a higher quality contribution which must have required some effort. It is appreciated.

 

i sure did read a whole hell of a lot of patents - having never navigated those types of docs bfore, that was extremely mind-numbing and painful haha. but once i started to understand what was going on with this situation, it was just a hunt to track down all the disparate pieces. This isn't just a Greenblatt-esque, tiny spinoff/forced selling opportunity trading at less than cash. That's what I thought it was at first. Until I found the patents. And then it was like getting hit by a freight train. It is an orphan spinoff, but also so much more. And it's not just Algovita, it's the IPG platform. I looked into the whole "platform" thing, too, and I'll do a post on how important it is later on.

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To sum it all up:

 

Patients want effective pain relief, and they want the SCS to be discreet. Algovita provides 12 electrode coverage of the 3 dermatomes, independent power sources for each electrode, and the widest set of programming options. Also, the smaller volume, thin-film lead tips mean that doctors can place them more accurately in the epidural space (they have improved steerability compared to LCPs), and once placed, the stretchy lead body means the lead tip is less likely to become displaced. And, because of independent power and full 3 dermatome coverage, their doctor can adjust their settings as the pain migrates. So that's effective pain relief. For discreteness, Algovita's IPG is the smallest and thinnest. And it comes with a cool little key fob, which is basically something patients can take with them to change between settings - it's a wireless connection (not wired), it's not some giant device, etc. - it really is discreet...it could be the unlock/lock buttons for your car, for all anyone who sees it would know.

 

For doctors, the lead is the most important thing. This is what they touch the most, and this causes the most complications. Algovita's has the aforementioned steerability and stretchiness, which means it's easier for the doctor to implant and less likely that a complication occurs. Also, because they place the 12 electrode lead in the same place for all pts, they don't have to fool around with trying an 8 electrode lead on 2 dermatomes, or an elongated 8 electrode lead on 3, etc -> they place the lead, which is easy to do bc small, and then the next step is programming (or, asking the patient which electrodes help their pain). They don't have to worry about coverage, because they have full coverage. So the procedure is fairly simple, and it's fast - I think I read that Algovita is a 1 hour procedure time, and others are up to 4 hours? Not sure on the #s in the prior sentence, but I did read them somewhere, just not 100% confident on them. Since doctors get paid per patient, you can see how a 1 hr procedure would be preferable to 4 hours - especially if the lead is easier to steer and place, the pain mitigation effectiveness is superior due to full dermatome coverage and independent power sources, and risk of complicatons due to lead breakage/migration is lower.

 

For payers, cost-effectiveness is the most important thing. The more complications that arise, the more expensive revision surgeries, the less the payer wants to foot the bill. So if you can deliver a device that solves alot of problems related to complications, that's huge when talking about all-in costs. So, flexible lead body is the biggest thing on the complications front - mitigates odds of lead breakage/migration. And finally, if you can deliver more effective pain mitigation, b/c u have better electrode coverage, can steer the stim with independent power sources, and have a wider range of stim parameters available (frequency, etc.), and this actually results in less opioid use by the patient, this is also huge. Alot of ppl with SCS implants reduce the # of painkillers they take bc the SCS helps with pain. If Algovita's SCS is better, and they can get people to take even fewer pain meds, or relinquish them entirely, the payer will love you because 1) lower pharmaceutical costs, and 2)fewer health complications down the road as result of opioid dependency.

 

Separately. MDT+BSX+SJT make up like 98% of the SCS market. But we know that the total addressable patient population is way under-penetrated - something like 10% penetration, which leaves 90% open. The way I think about it is, if this device really improves the effectiveness of the therapy, bc of 3 dermatome full coverage, independent power sources (and ability to turn on new electrodes when pain migrates), wide programming parameters, etc....the market opportunity could not only be the 10% penetration represented by MDT, BSX, and SJT, but it could also involve the other 90% that isn't penetrated. Hell, SCS only works on 60% of people. This is probably due to poor lead placement, inflexible power delivery, complications, etc. If Algovita can get from 60% to 90% effectiveness (and, by transitive property, get from 60% to 90% conversion), they've just increased the market size by 50%. And if they're the only one who can get 90%, while everyone else gets 60%, then they're the prime beneficiary of market growth. In effect, it's not market growth, it's algovita growth. And, if it really is way better, then maybe instead of 10% of addressable mkt trying it, 20% decide to try it. Between hitting the underpenetrated segments and increasing trial-to-permanent conversion efficiency, they could basically increase the size of the market by orders of magnitude. And, I found something interesting recently. I think it was SJT 10-k, maybe it was BSX. Basically, they said that recently, SCS sales have been driven by replacement volumes, but that the market should grow in the future as new competitors bring products to market and increase awareness. So, maybe. But the way I think of it is, basically you have a huge installed base of people with back pain. And 10% of them use SCS, and 90% don't. The number of ppl with backpain doesn't grow alot in any given year - maybe it increases by a few percent over a decade, as baby boomers become a larger % of the population. The way I understand it is, organic volume growth comes from better penetration of that underpenetrated base, not as much from the base itself growing (although it does, slowly and over time). So, maybe competitor products (like Algovita) will bring awareness and that's what will cause market growth. Or maybe, Algovita can penetrate a segment of the population that SJT, BSX, and MDT cannot, because of everything ive written about, and that's what will cause market growth. And if Algovita's innovation causes market growth, and not the awareness that competitor products bring to the space, then Algovita will be the prime beneficiary of this market growth, which of course, they created. This last paragraph was scrambled, but i wanted to point out that SJT had even called out the fact that competitor products would lead to market growth. From there, I deduced that market growth was really improving penetration of the "installed base". And if those two are true, and Algovita is a new competitor product, and for our own reasons we believe that Algovita has serious value add and seems like it could drive penetration (for the trillion reasons listed), it follows that Algovita will be driving market growth by penetrating a larger % of ppl with back and leg pain than the LCPs are capable of. And when better technology comes out in the med device space, market share shifts can be really really fast - i think this was stated in the 10-12/b or something, and I also looked at a case study with Drug-eluting Stents in the mid 2000s which provided some historical evidence that market share can, in fact, shift very rapidly in response to technological change.

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Impressive research, it's a very difficult space. Why aren't insiders buying hand over fist? If Drees received 6.9m from his stake in Algostim and Pelvistim he shouldn't lack liquidity. Still he only has restricted stock units? Which forums do you read re patient feedback? Why do you think GB spun it off? (I'm thinking there's a huge potential liability if these products fuck up. It can be a real mess to stuff the insides of people with electronics. It actually chills my spine (hehe) to think of having a battery inside of me that gets hot when charging). Much appreciated.

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That was a great read wjsco. You and stockspinoff have done some good research. As a long term holder of MDT , I pay attention to these products. Looks like the product has some good reviews. I have attached the link at the bottom. Wonder if you guys can shed some light on these three points:

 

1. Getting a product to the market is half the game , the other half is getting approvals from the hospitals and the insurers. Everything from price,staff training, supply agreements to liabilities are negotiated. Its easier to deal with insurers since there are few but hospitals are a big pain. Every hospital has its own approval process. Any ideas how far they are? Do they report these metrics?

BTW MDT captures the lion's share because of the extensive network and the relationships they have developed over the years. Even if their offering are not the best, don't underestimate their moat via these networks. Its really hard for a small fish to challenge them.

 

2. Their clinical trials wouldn't conclude until Sept 2018. The result from the primary will be published in Feb 2017, the market reaction so far tells me that

the news may not be that good. You guys have any insights?

 

3. They just switched suppliers on December 12th from GB to Minnetronix. The filings are a little confusing, it states that Minnetronix will only supply the external peripherals for Algovita SCS but then another line said that Nuvectra has notified GB that its terminating its supplier relationship. Does that mean that GB will still assemble the Algovita but will source externals from Minnetronix? Changing suppliers can be a big hassle. 

 

A good site for reviews:

http://www.spine-health.com/forum/categories/spinal-cord-stimulation

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Impressive research, it's a very difficult space. Why aren't insiders buying hand over fist? If Drees received 6.9m from his stake in Algostim and Pelvistim he shouldn't lack liquidity. Still he only has restricted stock units? Which forums do you read re patient feedback? Why do you think GB spun it off? (I'm thinking there's a huge potential liability if these products fuck up. It can be a real mess to stuff the insides of people with electronics. It actually chills my spine (hehe) to think of having a battery inside of me that gets hot when charging). Much appreciated.

 

1) Regarding why aren't insiders buying. I'm not sure, but I do know that 1m shares are reserved for equity comp (10% CSO), and 400k get authorized each year (4% CSO). And base salary isn't too big, so most of their comp is tied up in equity awards i think. Scott did make get money from his minority interests, and i know he made a few million from the ANS sale. but i don't think he's exactly loaded. Also, as he's issued equity and the share price appreciates, his nvtr holdings will become a much larger portion of his net worth, and the whole diversification thing. but in reality i dont know - i always wish that mgmt is buying stock when i think it's cheap, but if it doesn't happen, it doesn't mean it's not cheap.

 

2) For patient reviews / feedback, this was the best one I could find. It just has the most people on it..: http://www.spine-health.com/forum/categories/spinal-cord-stimulation

 

3) The end game has always been to spin it off. It wasn't a decision that they made in 2015. From the very start, the idea was to incubate Algostim/Pelvistim, and then spin them off once they got the approvals and could start selling. if you look at greatbatch's results in past few years, they provide GAAP and nonGAAP, and nonGAAP excluded the investment they were pouring into Algostim and Pelvistim. the idea was to create a platform that could address any indication. and greatbatch would supply the platform device under long term agreements - basically they were very incentivized to make this platform idea work, because if it does work, and they supply the platform device under long term supply agreements to all of these different OEMs that are coming out with new electrode technologies to address new indications, you can see how that would be a windfall. One of the keys is that the IPG and lead bodies can be adapted for any indication, and already has a pMA - you just need new lead tips (electrode arrays) and stim settings (programming). So if they want to apply for approval for a new indication, like DBS for example, and the DBS system uses the same device but just uses different lead tips and programming settings, they get to use the Panel Track supplement route instead of having to do the entire PMA process. Which significantly improves time and cost to get to market. Which is a huge competitive advantage in this space. So one of the big benefits of doing Algostim and Pelvistim was that they now had the processes and procedures in place to do device design, development, validation, and all the way through FDA approval. And with their platform, the process is faster, b/c they only have to apply for approval for a new indication, which requires a PMA supplement, which is alot faster than the full PMA thing. So recently, Alevo partnered with Nuvectra and GReatbatch. Alevo has a DBS system that's supposedly alot better than existing products (basically, the electrode in DBS LCPs is ring-shaped...the lead tip is cyclindrical, and the electrodes are shaped as rings around the cylinder, and stimulation is applied to the entire ring. Alevo developed an electrode thats also ring-shaped, but it has 3 individual electrodes spaced evenly along the ring, and using Nuvectra's independent power sources, they can direct the stimulation to only one electrode (e.g. in only one direction), which is better than the full ring bc the full ring applies stim to areas of the brain that you don't want it to, which obviously, being the brain, has negative implications - note, medtronic can't do this because it doesn't have independent power sources). Nuvectra licensed the neuromod technology to Alevo (because nVTR has exclusive right to use the technology in the neuromod space), and Alevo also signed a development and supply contract with nvtr/greatbatch - so now, greatbatch will be designing/developing/getting approval for Alevo's device, and i think the majority of GB's compensation is the fact that it gets the exclusive supply agreement to provide the iPG, lead bodies, etc. So basically, Algostim and Pelvistim was a demo run that they used to show OEMs (like Alevo - OEMs in this context means folks who develop electrodes for new indications - the only thing that changes for each indication is the type of lead tip used and the programmed stimulation parameters) that they could do the entire design/validation/FDA approval lifecycle. Greatbatch helps the oEMS in the design/development/approval phases, using it's extensive engineering/manufacturing/regulatory approval expertise, and in return, basically gets to place the vast majority of the content in these devices.

 

Also, interestingly, Nuvectra effectively has shares in Alevo - in addition to the royalty, upon a liquidity event, Nuvectra receives the difference between 20% and whatever Greatbatch's stake in (or something like that - it goes down from 20% to 15% to 10%, but i dont know what triggers movement down the scale, and I don't know GB's ownership %, and i don't know how much alevo would be worth anyways - but the point is, this is a little hidden asset that nvtr has)

 

Not sure what you meant by the liability thing - Greatbatch already produces components for something like 95% of neuromod devices. And they're also doing the manufacturing for Nuvectra...so they would definitely retain that risk. just not sure where you're going with this...

 

 

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That was a great read wjsco. You and stockspinoff have done some good research. As a long term holder of MDT , I pay attention to these products. Looks like the product has some good reviews. I have attached the link at the bottom. Wonder if you guys can shed some light on these three points:

 

1. Getting a product to the market is half the game , the other half is getting approvals from the hospitals and the insurers. Everything from price,staff training, supply agreements to liabilities are negotiated. Its easier to deal with insurers since there are few but hospitals are a big pain. Every hospital has its own approval process. Any ideas how far they are? Do they report these metrics?

BTW MDT captures the lion's share because of the extensive network and the relationships they have developed over the years. Even if their offering are not the best, don't underestimate their moat via these networks. Its really hard for a small fish to challenge them.

 

2. Their clinical trials wouldn't conclude until Sept 2018. The result from the primary will be published in Feb 2017, the market reaction so far tells me that

the news may not be that good. You guys have any insights?

 

3. They just switched suppliers on December 12th from GB to Minnetronix. The filings are a little confusing, it states that Minnetronix will only supply the external peripherals for Algovita SCS but then another line said that Nuvectra has notified GB that its terminating its supplier relationship. Does that mean that GB will still assemble the Algovita but will source externals from Minnetronix? Changing suppliers can be a big hassle. 

 

A good site for reviews:

http://www.spine-health.com/forum/categories/spinal-cord-stimulation

 

1) Yep, this is true. I believe they've already discovered the difficulties with hospital approvals. So, that's true, but it's also good that they've identified this as an impediment relatively quickly - it sounds like they had underestimated it, maybe. But, again, they've identified it, and I believe they just made an executive hire who's entire job is hospital approvals.

Also, that makes sense about MDT. I guess I'd say two things:a) i think there's only single digit thousands of pain specialists in the US. I read in ANS's 10k from 2004 that there were 3000 back then, and it mightve grown a bit, but single digit thousands. And Scott Drees has been in this space for 25 years, and i would guess that after this long, including time as head of sales at ANS, he also has a very robust physician network. In fact, GreatBatch refers to Scott Drees as their "commercialization partner." And he brought on a few people who had been at ANS and moved to St Jude, etc. He actually mentioned in an earnings call that some of their competitors had hired more sales reps to boost sales, but all that accomplished was to effectively decrease the existing sales reps' territory (more people in same amount of space means less space per person). So I don't think they've had trouble poaching an experienced sales management team. And b) Morningstar touches on their physician network, and mentions that Medtronic does have a bit of leeway with docs bc of its relationships, but it also mentions that this isn't exactly a super sticky relationship. If doctors see a significantly better technology for a certain indication, they're not going to stick with MDT. If the competitor product is only marginally better, maybe the docs stick with MDT bc they're used to it, the relationship, etc - but not if there's new tech that's a significant, material improvement over what mdt has.

 

2) What have you heard about the trial results? If you're just referencing the stock price, i would say that's probably not a good indicator for their clinical study results. Secondly, I also saw the same info on clinicaltrials.gov or whatever, but didn't NVTR just create a MAB that was going to help them design their clinical studies? But clinicaltrials.gov says that the trial started in 2015? So not really sure what's going on here. But, I did fine one interesting review on a random forum - some guy posted a comment in a nuvectra/algovita forum, and said "doctors love it, nevro better watch out" or something like that. Not saying that's the truth, but it makes sense with what we know about the leads, and it was so random that it gave it an air of credibility.

 

3) They didn't switch suppliers. Previously, Greatbatch bought the external peripheral devices from Minnetronix, and then re-sold them to Nuvectra. So Nuvectra just started buying these external devices directly from Minnetronix. I don't think there's any implication here - the only thing it does is tighten up the supply chain. NVTR said it was terminating its obligation to purchase the external peripheral devices from GB under the supply agreement. Which is true, because now its buying them directly from the source. But this is good for GB - i doubt that their compensation under the supply agreement is a function of reselling a third party peripheral device to NVTR, and it was an unnecessary inventory investment - ties up capital and doesnt contribute to returns. who knows. but point is, dont think this is material.

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Looks like its a binary outcome for Nuvectra. For Algovita to be successful 2 things have to happen whose probabilities I estimate as follows

 

1) they have to do well in post-clinical trails (60%)

2) they have to get hospital approvals and insurer approvals (50%)

 

I would estimate about a 30% total probability of success. I would guess that within 2 years we will know if this works.  So lets aim for about a 35% expected return a year due to the risk involved. So after 2 years I want an expected return of 1.35^2 -1 = 82%. To get that assuming a 30% chance of success I need 1.82/0.3 = 6. It should be around a 6 bagger. Current mcap is 50 million and so I need it to be at 300 million in two years.

 

Nevro traded at something like 8 times 2016 estimated sales. I would guess Algovita would get a multiple of 4 times estimated 2018 sales and so you are looking at revenue of 300/4=75 million which is a bit of a stretch even if 1) and 2) both happen.

 

Does anybody know Nevro's history. Its the closest thing I can compare Algovita to.

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I'm not familiar with this technology nor the company but I've been following the thread. My brother in law is a doctor at Barrow's Neurological Institute in the Saint Joseph's Hospital in Phoenix, which I consider one of the best places in the world for neurological medicine. I've just called him to ask about this and he told me they are currently using Nevro and they are doing about 3 per week, which is a very small number! He also told me they don't think this is the appropriate medical solution for most of patients.

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Looks like its a binary outcome for Nuvectra. For Algovita to be successful 2 things have to happen whose probabilities I estimate as follows

 

1) they have to do well in post-clinical trails (60%)

2) they have to get hospital approvals and insurer approvals (50%)

 

I would estimate about a 30% total probability of success. I would guess that within 2 years we will know if this works.  So lets aim for about a 35% expected return a year due to the risk involved. So after 2 years I want an expected return of 1.35^2 -1 = 82%. To get that assuming a 30% chance of success I need 1.82/0.3 = 6. It should be around a 6 bagger. Current mcap is 50 million and so I need it to be at 300 million in two years.

 

Nevro traded at something like 8 times 2016 estimated sales. I would guess Algovita would get a multiple of 4 times estimated 2018 sales and so you are looking at revenue of 300/4=75 million which is a bit of a stretch even if 1) and 2) both happen.

 

Does anybody know Nevro's history. Its the closest thing I can compare Algovita to.

 

How did you arrive at your probability estimates?

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Cafepharma forums seem to suggest Nuvectra is old tech, while Nevro is superior with HF

 

For example:

http://cafepharma.com/boards/threads/nevro-or-nuvectra.603504/

 

 

---

sorry just read your previous post wjsco - even if Nuvectra has the potential to include HF technology or other features, it does need to ramp up Algovita quickly in the next few quarters with essentially a non-ground breaking (according to Cafepharma forums) product offering

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I want to get a better understanding as to whether nvtr innovations differentiate it enough from competitors to overcome their competitor's sales relationships before I invest. 

 

My understanding of Nuvectra's advantages are:

1. more effective lead placement

2. more effective in targeting 3 dermotomes instead of just 2

3. reduction in lead breakage and migration

4. more flexibility in programming different power settings to different areas

 

It would be great to get some feedback from doctors to confirm whether these are the important pain points and whether Nuvectra can address these pain points better than their competitors. Also, are there other pain points that trump the ones listed?  Anyone know any neurosurgeons who specialize in this sort of thing?

 

Below is a link to an article about another new technology in SCS that is wireless which would likely negate the lead breakage and migration issue much more effectively than nvtr

 

http://www.businesswire.com/news/home/20141202005347/en/Stimwave-Receives-FDA-Clearance-World%E2%80%99s-Injectable-Wireless

 

Also, it looks like Nevro is suing Boston Scientific for infringing on its hf patent. 

 

wjsco, thanks for doing the leg work on the patents.  Also, thanks to stockspinoff for bringing the idea to the board. 

 

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