When TranS1 stock went public in September 2007 the sky seemed like the limit, with an IPO above $23 per share. By October, the stock grew to almost $25. Then things fell, and as recently as last December the stock was below the $2 mark.

What happened between was a series of hard knocks the company could not have predicted. Not only did the stock suffer from the economic downturn of late 2008, much the same as the entire marketplace, but two other significant factors delivered what could have been a deadly blow.

“We got hit with the perfect storm,” said Joe Slattery, executive vice president and chief financial officer at TranS1.

According to Slattery, in mid-2008 health care companies began to examine the most expensive medical procedures and look for ways to cut costs. Spinal fusion surgeries ranked high on that list. TranS1 provides a unique, less invasive spinal fusion procedure.

“The spine market was growing 10 percent a year. In 2009, health care companies said, ‘Enough. We can’t keep doing this,’” Slattery said.

The majority of the health care industry made a decision to stop reimbursement for spinal fusion surgeries solely on the basis of Degenerative Disc Disease, or DDD.

“Lumbar spine fusion surgery may be accompanied by a number of complications and is costly,” said Lew Borman, a Blue Cross Blue Shield representative, in an email.

“They said no more DDD-only procedures. When they shut it off, it hurt us more than anyone else,” Slattery said.

The decision impacted TranS1 because of the nature of the procedure. The company, which houses 50 employees in a 32,000-square-foot office across from the New Hanover County government complex, offers a unique, less invasive spinal fusion implant surgery for the L5S1 disc and other surrounding discs. The procedure is different because it requires only a small incision above the tailbone, unlike other surgeries that access the spine through larger incisions to the stomach or back.

“It’s certainly less invasive than some other procedures,” said Dr. William Mitchell, a spinal surgeon and board member at the North American Spine Society, of the TranS1 procedure.

Because the TranS1 surgery requires less of patients – the surgery typically takes 30 minutes, opposed to 90 minutes for other spinal fusions, along with a rehab time usually half of other surgeries – doctors advise patients that suffer from DDD to try the surgery.

“DDD was growing much faster than the rest because minimum invasion made it easier to do. The risk of the procedure was so low, it was worth it,” Slattery said.

“The bar is being set higher and higher for payments,” Mitchell said. “There is a growing movement to not pay for any lumbar fusion.”

On June 1, 2009, TranS1 stock (TSON on the Nasdaq Exchange) closed at $8. Before the month was over, the stock dropped 20 percent. The other shoe had dropped.

Another setback

A change in the American Medical Association surgery codes triggered the second fall. When the TranS1 procedure gained FDA clearance in 2005, doctors used an existing AMA code for similar spinal fusion surgeries.

“Everything was going great, business was growing fast,” Slattery said.

Again, in mid-2008, the spine society recommended that since the TranS1 surgery was so unique, it required its own AMA code. That decision made reimbursement for the surgery a much harder proposition.

In January 2009, the TranS1 surgery went from a Category I AMA code to a Category III code.

“Category I is an accepted code. Category III is the beginning of codes. It requires a lot of work to get paid. After 5,000 implants, then we have to set up a code,” Slattery said.

Mitchell said that Category III codes are typically applied to experimental surgeries.

In February 2009, TranS1 began a five-year timeframe to move from Category III to Category I.

Door closes, door opens

According to AMA spokesperson Robert Mills, TranS1 has not applied for re-categorization, but the company is expected to present at an AMA coding meeting this October.

Slattery and Mills both said that a recommendation from a specialty society to the AMA goes a long way towards recoding. Though there are many specialty societies that focus on the spine, TranS1 has submitted studies in an effort to get NASS to offer a recommendation.

“NASS support is the $64 million question. We have a series of clinical data coming out we believe will be enough to get us over the hump,” Slattery said.

Mitchell will be one of the people who makes the determination.

“The whole belief that Category I code is the Holy Grail is erroneous. If the evidence is lacking, providers won’t pay for it,” Mitchell said.

In that context, TranS1 has already made significant inroads. Beginning this year, Humana health insurance began reimbursing for the procedure. Humana covers about 10 million Americans.

“The Humana decision was huge. It was the first positive coverage decision we have. They’ve seen enough data,” Slattery said.

When the Humana news broke, TranS1 stock bumped up from below $2 to where it currently sits at about $3.50. TranS1 is in negotiations with more than 10 other insurance carriers to add reimbursement for the procedure. Blue Cross Blue Shield North Carolina, the largest insurance carrier in the Wilmington market, is a target for TranS1.

“BCBSNC will provide coverage for Lumbar Spinal Fusion when it is determined to be medically necessary because the medical criteria and guidelines are met,” Blue Cross’ Borman said.

Slattery is especially equipped to guide TranS1 through this transitional period. He previously worked for a company called Digene that developed a test for the sexually transmitted disease HPV. The test Digene created is now universally accepted, and the test gained acceptance independent of AMA coding.

“We can already get reimbursement today. We can and have gotten reimbursement without the code. We don’t need ubiquitous coverage to grow this market,” Slattery said.

“The cycle can be very long. You don’t know when it is going to happen.”

Slattery said he hopes for another three or four insurance carriers to accept the TranS1 procedure this year. And if things go right at the AMA presentation in October, perhaps TranS1 stock levels would return to previous heights.

The market for spinal fusion surgeries generates almost $3 billion annually.

“I would be perfectly happy with 5 percent of a $3 billion market,” Slattery said.