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Whalebone Advisory provides investor relations and strategic advisory services to publicy-traded, pre-IPO, and development stage healthcare companies.
September 15, 2017

GOP Tries Repeal Again As Sanders Calls for Single Payer;
Plus: TEVA Hires CEO, THC Explores Options

As we discussed in last week’s edition, Senate Republicans are making one last effort to repeal/replace the Affordable Care Act (ACA) before the September 30 deadline to pass such a bill via budget reconciliation. Co-sponsored by Senators Bill Cassidy (LA) and Lindsey Graham (SC), the legislation proposes to end the ACA’s cost-sharing subsidies for the individual exchanges and also converts funds used for Medicaid expansion into block grants for states to spend on their Medicaid programs.
This bill has support from the more conservative wing of the party as it dramatically shifts the cost burden from the federal government to the states. Despite support from the Administration, particularly Vice President Pence, Senate leadership is not actively courting votes, and Majority Leader Mitch McConnell has said that he will bring this bill to a vote only if the co-sponsors can muster 50 votes themselves. It is also unclear what kind of support this legislation would have in the House, and with relatively few days left (given the Jewish holidays and other urgent matters on the table such as the debt ceiling), there is not much opportunity for debate or negotiation.
Even President Trump himself has recognized that repeal/replace is no longer a realistic option and has changed his tune from “let Obamacare implode” to “we’re going to get it changed.” So, while some Republicans may continue with these Hail Mary repeal/replace attempts, we will instead focus on the ongoing efforts to stabilize the exchanges, especially with the President now apparently in support of that endeavor.
On the other side of the aisle, some Democrats are beginning to build support for Bernie Sanders’ (VT) proposal to move to a single-payer system that would effectively be “Medicare for all.” A number of prominent Democratic Senators – including Cory Booker (NJ), Al Franken (MN), Kirsten Gillibrand (NY), Kamala Harris (CA), and Elizabeth Warren (NJ) – have publicly expressed support for this idea. However, Minority Leader Chuck Schumer stopped short of endorsing Sanders’ bill, while others have referred to it as a “good starting point.”
No one actually believes that single payer has a chance of passing in the near term, certainly not with Republican control of the House, Senate, and White House. But it also does not have anywhere close to unanimous support among Democrats either, despite the positive public comments. We do find it notable that more Democrats are now willing to go on record on this issue, when in the past it was considered virtual political suicide. However, it seems to us to be analogous to Republicans regularly voting to repeal the ACA during the Obama Administration – there is plenty of political cover to voice support for something that will not actually come to fruition. As we have seen in recent months, now that Republicans could actually pass a repeal, they are suddenly unable to reach consensus on how precisely to do so.
The same appears to be true of single payer. For many Democrats, it is a nice idea in theory. But no one has provided details on how such a system would be financed or administered. Sanders has suggested several new taxes to finance the bill, but it has not yet been scored or debated, so feasibility is not entirely clear. Would it truly be “Medicare for all” (as Sanders proposes), would Medicaid have a role, or would there be an entirely separate entity managing the non-Medicare, non-Medicaid segment of the population? Would it eliminate insurance companies altogether, or would it engage them to manage highly-regulated versions of their current Medicare Advantage programs?
Without many details or actions beyond press conferences or the drafting of talking points, it is easy for prominent Democrats, particularly those considering running for President in 2020, to endorse the concept as a counterbalance to the proposals emanating from the GOP. We would also expect increased discussion/debate over the merits and/or feasibility of single payer in the run-up to (and during) the 2020 election cycle. In the meantime, however, the focus will likely soon shift to fixing/strengthening the ACA exchanges once the GOP finally puts to rest the notion of repeal/replace.

TEVA Hires Lundbeck's Schultz, Sells Paraguard to COO

Teva Pharmaceuticals (TEVA) on Monday announced that it has hired Kare Schultz, formerly the CEO of Lundbeck and Novo Nordisk, to succeed Yitzhak Peterburg as President and CEO. With TEVA struggling for an extended period of time, the Street viewed this move positively, as the company has brought in a seasoned pharma executive with an extended track record of accomplishment, including a successful turnaround at Lundbeck. TEVA’s focus will likely remain on reducing costs and paying down debt, but there will also be an emphasis on stabilizing the core generics business (particularly in light of coming generic Copaxone competition).
From a debt repayment standpoint, TEVA also announced this week that it is selling its Paraguard intrauterine device (IUD) to Cooper Companies (COO) for $1.1 billion. Paraguard is currently the only non-hormonal IUD with an indication for use of up to 10 years on the market in the US, and it carries a 99% effectiveness rate. The purchase price represents a multiple of approximate 10x EV/EBITDA, which the Street sees as a reasonable valuation for a successful product that no longer fits within TEVA’s core competencies but that COO should be able to integrate relatively easily. The deal is expected to be roughly 7% accretive to COO’s cash EPS in FY 2018 and represents an opportunity for revenue and cost synergies.

HC Services: THC Explores Strategic Options; CNC Buys Fidelis Care

The drama continues for Tenet Healthcare (THC), who only last month announced that Chairman and CEO Trevor Fetter plans to step down by March 15, 2018 and that it is adopting a poison pill to limit the advances of activist investors. The company this week announced that it has engaged two investment banks to explore strategic options, which includes the potential sale of the entire company. An outright sale seems unlikely given both THC’s high debt load (which makes private equity a difficult fit) and the significant overlap (and ensuing antitrust issues) with HCA, who would seem to be the only hospital company capable of acquiring THC.
Therefore, the most likely scenario would be further asset divestures, similar to the ongoing strategy employed by Community Health Systems (CYH). HCA would seemingly be interested in several of THC’s assets, so the Street expects there to be discussions between the two companies. Private equity could also step in for individual assets from a roll-up standpoint, so the focus for THC would seem to be identifying which core assets make sense to keep and make the centerpieces of the rebuilding effort. How the company intends to refresh its leadership team and Board of Directors will also greatly inform the nature of the turnaround effort.

In a deal that was completed, Centene (CNC) this week acquired substantially all of the assets of Fidelis Care, which will become CNC’s health insurance plan in New York State, for $3.75 billion. CNC expects this deal to be significantly accretive to EPS in the first year following deal close (currently targeted for January 1, 2018), driven largely by material revenue and cost synergies. The Street uniformly likes the deal, which gives CNC 8.5 million more Medicaid members and helps ensure that Fidelis will continue to generate double-digit revenue growth. Fidelis’ non-profit status could cause some difficulties in securing New York State regulatory approvals, but analysts generally view that as a surmountable challenge.

In Other News: Implications of AGN Patent Transfer;
GKOS, LIVN Investor Day Takeaways

In a case that could have far-reaching implications on the biopharma industry, Allergan (AGN) last week reached agreement to transfer ownership of all Orange Book patents on Restasis to the Saint Regis Mohawk Tribe and will license those patents from the Tribe. In exchange, the Tribe will exercise sovereign immunity and dismiss the inter-partes review (IPR) of the patents. There is still an ongoing patent challenge in district court that observers believe could go either way, so AGN is not entirely out of the woods with respect to its Restasis IP. However, this structure of transferring patent portfolios to a sovereign entity could set a precedent for other IPR cases, including those involving Amgen’s (AMGN) Enbrel and Pfizer’s (PFE) Prevnar.
Two medical device companies hosted investor days on Thursday. Glaukos (GKOS) held its first such event as a public company, and while it presented strong clinical data from its iDose phase 2 trial, management lowered 2017 revenue guidance (by $3 million in 3Q and $4 million in 4Q) to account for increased competition (most notably from Novartis’ CyPass). The stock fell 18% on the guidance news, but analysts generally remain positive on the long-term story, driven largely by the positive iDose data (which showed greater reduction in intra-ocular pressure than the control group) and robust overall product pipeline, which many believe can lead to upside in 2018 and beyond. However, there is now increased pressure on management to execute by accelerating revenue growth and delivering on the pipeline opportunities for what the Street views as a best-in-class technology.
LivaNova (LIVN) also hosted analysts and investors on Thursday, with the main highlight being the company’s announcement that it plans to divest its CRM business (which management has hinted at in the past). Given its slow-growth and low-margin nature, analysts expect this sale to accelerate revenue growth and be accretive to margins. Management emphasized mitral valve, chronic heart failure, and neuromodulation as key long-term growth drivers and set five-year financial guidance targets that the Street views as achievable. The question remains what LIVN will do with eventual CRM proceeds – share repurchases or further M&A.

Quiet Week Ahead Due to Jewish Holiday

Next week’s calendar is relatively light due in part to the Jewish holiday of Rosh Hashannah, which begins Wednesday night. The Clinical Robotic Surgery Association (CRSA) holds its Worldwide Congress in Chicago beginning on Friday. The following week will be extremely busy with investor conferences, trade shows, and analyst days.
Please see the calendar below for a comprehensive look at key events in healthcare through the end of October, including a very early look at the September quarter earnings season. As always, we welcome all feedback, and have a great weekend!


Jeremy Feffer
Managing Member
Whalebone Advisory, LLC
T: 646.580.5583 | M: 917.749.1494
Copyright © 2017 Whalebone Advisory LLC, All rights reserved.

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