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Whalebone Advisory provides investor relations and strategic advisory services to publicy-traded, pre-IPO, and development stage healthcare companies.
July 28, 2017

BCRA Officially Dead in Senate, So Is Bipartisanship Next?
Plus: AMZN Moving into Digital Health; Earnings Mostly Positive Thus Far

Things certainly looked bleak a week ago after Majority Leader Mitch McConnell pulled the Better Care Reconciliation Act (BCRA) once it became clear that he did not have enough support in his caucus to pass the bill. Then came the suggestion of passing a clean repeal of the Affordable Care Act (ACA) with a two-year implementation delay to buy more time to develop a replacement. However, the CBO score of that idea only added to the consternation of moderate Senate Republicans, leaving McConnell with little choice but to move on from healthcare altogether.
McConnell changed course over the weekend after President Trump urged him to move forward, leading to Tuesday’s scheduling of a vote to begin debate on the BCRA and various amendments. While there seemed to be momentum on McConnell’s side, particularly with John McCain returning to Washington following last week’s revelation that he has been diagnosed with glioblastoma and with Vice President Pence casting the tie-breaking vote to begin debate.
The momentum stopped there, however. First, the Senate considered a new amendment, combining Ted Cruz’s proposal to allow insurers to offer barebones, non-ACA-compliant plans with a new measure providing an additional $100 billion for Medicaid. Because this amendment was not scored by the CBO, the Senate Parliamentarian ruled that it did not meet budget reconciliation rules and therefore would need 60 votes to pass. That detail did not matter much as nine Republicans broke rank, and the bill was voted down 43-57. The Senate on Wednesday moved to a vote on the clean repeal of the ACA, and that measure was defeated as well, with seven Republicans joining all 48 Democrats in a 45-55 margin.
So, as we queried last week, now what? The short answer is that the Senate will continue debating various repeal options, including narrower measures aimed at specific aspects of the ACA. The most obvious targets will be the individual mandate (requiring everyone to be insured) and certain ACA taxes, such as the medical device excise tax. The Senate would then work to integrate these changes with the House’s American Health Care Act (AHCA) to take one more run at a purely partisan repeal/replace effort. Keep in mind, however, that the AHCA passed the more conservative House by the thinnest of margins, so it is not immediately clear how changes to the AHCA in one direction or the other will be received by House Republicans.
Therefore, while we expect McConnell and Speaker Paul Ryan to continue to find ways to get this done, the Street has all but given up hope on anything happening this year. It seems to us that the most logical step would be to seek a bipartisan solution with moderate Democrats willing and eager to fix the parts of the ACA that are not working properly. From a certain perspective, it is understandable that Republicans are loathe to work with Democrats on a bill that they have campaigned tirelessly for seven years to repeal. However, Republican leadership has grossly underestimated the divisions within the party and now faces the prospect of going before the electorate next year with nothing to show for perhaps its top legislative priority.
The GOP will have to decide what is more important – securing an important legislative victory, even if it means working with Democrats, or not compromising core principles, even it means the ACA remains the law of the land indefinitely. It will also be interesting to see how this process impacts tax reform; if the same divisions within the party keep the GOP from passing tax reform, do they move to bipartisanship more quickly or stick to the same script? We will continue to follow this drama as it unfolds over the next few weeks.

WBMD Acquired by KKR for 11x EBITDA, Fueled By Increased Drug Ad Spend

After first announcing in February that it was exploring strategic alternatives, WebMD Health (WBMD) announced on Monday that it had reached a deal to be acquired by KKR’s Internet Brands subsidiary for $66.50 per share. This price represents a 20% premium over last Friday’s close and 30% increase from when WBMD first indicated its interest in seeking a buyer. The deal is expected to close in the fourth quarter.
The company also issued second quarter financial results, posting revenue and EBITDA well above both Street consensus and management’s own guidance for the quarter. WBMD attributed the strength to the rebound in drug approvals in both the US and Europe, which in turn has driven an increase in advertising demand for pharma companies. The deal’s valuation (11x EBITDA) came as somewhat of a surprise to analysts, who view this level as a new potential benchmark for other players in the space.

Hospital Capital Spending Environment Remains Stable Despite DC Uncertainty

Two of the largest medical capital equipment makers, General Electric (GE) and Phillips (PHG) reported results this week and provided color on their healthcare businesses. GE saw worldwide healthcare equipment orders grow 4% ex-FX in the second quarter driven largely by continued strong momentum in China, while growth in the US and Europe slowed due to tougher year-over-year comparisons.  While PHG’s worldwide equipment order growth grew faster than GE’s in the quarter, the company noted similar geographic trends, as China was the key driver of international strength.
Consistent with what we saw last week from Intuitive Surgical (ISRG) and this week from Varian Medical (VAR), these results suggest a solid and stable global hospital capex environment. PHG management did call out legislative uncertainty for slight softness in the US, and it is true that some hospitals or systems are delaying certain investments until there is more clarity on what the repeal/replace process will produce. However, as it becomes increasingly clear that the ACA will not repealed, hospitals are more comfortable staying the course on their operating and capital plans, particularly with utilization trends remaining stable.

In Other News: AMZN Investing in Digital Health; 
CYH Pre-Announces EBITDA Miss; FDA Approves SPNC's Stellarex 

With the healthcare world still figuring out what role Amazon (AMZN) can and will play in the pharmacy business, it can now add electronic health records and telemedicine to that list. CNBC on Wednesday reported that AMZN has a team (called “1492”) working in secret on hardware and software projects aimed at putting AMZN at the forefront of digital health. It is not clear yet what precise products AMZN is working to build or when anything might be ready for public release. But, as we have discussed in the past, large tech firms are moving rapidly and comprehensively into various areas of healthcare, so this news should surprise no one. It will be interesting to see how AMZN’s effort compares with that of Apple’s (AAPL), who continues to work on ways to make the iPhone into a central repository of patient health data.

Following additional hospital divestitures to HCA and ahead of its official 2Q earnings call next week, Community Health Systems (CYH) pre-announced results on Wednesday. While revenue will come in ahead of consensus, adjusted EBIDTA is well below the Street and down significantly from a year ago (due in part to an 11% decline in total adjusted admissions versus the same period last year). Management also announced that it continues to explore offers of interest from purchasers of additional hospitals (beyond the 30 that the company initially announced it would sell). As a result, the company lowered 2017 adjusted EBITDA guidance to well below consensus and now expects adjusted admissions to be negative for the year.
Spectranetics (SPNC) announced on Wednesday that the FDA has approved the company’s PMA for its Stellarex drug-coated balloon. Stellarex treats patients with peripheral arterial disease by restoring and maintaining blood flow in affected arteries. The Street had been expecting a third quarter approval, so this news was in line with expectations. This clearance also removes risk for PHG as it works to close its acquisition of SPNC (which was announced in late June).

Earnings Review: Insert

As we previewed in last week’s edition, this was an extremely busy earnings week. While results varied by sector and company, this week’s reports suggest a slight slowdown in overall utilization (as reflected in strong managed care results and soft hospital results), while lab volumes remain stable to strong, offset by slightly softer end market demand in biopharma (due, in part, to ongoing pricing erosion and legislative uncertainty). We review key results below (in the order of conference call):

  • Biogen (BIIB). Revenue topped estimates handily, led by upside from Spinraza, Tecfidera, and Avonex, while better-than-expected gross margin contributed to an EPS beat. Management plans to make MS, Spinraza, and better expense management to invest more in R&D its top strategic priorities.
  • Waters (WAT). Total revenue was roughly in line with the Street, but core growth missed slightly on softer pharma instrument demand, while improved operating leverage led to an EPS beat. Management attributed the pharma result to tougher year-over-year comps and stressed that biopharma end markets remain stable.
  • Centene (CNC). 2Q revenue, medical loss ratio (MLR), and EPS all beat consensus as better-than-expected performance in the Exchange business. With the Exchange business stable and the HealthNet integration complete, management raised 2017 EPS guidance, and the Street viewed the performance positively.
  • Quest Diagnostics (DGX). 2Q revenue was in line with consensus, but EPS came in well ahead of the Street (mostly on lower tax rate), and management raised 2017 revenue and EPS guidance ranges. Having recently closed several tuck-in acquisitions, the company remains focused on further consolidation and using M&A to boost top-line growth.
  • Eli Lilly (LLY). Upside from Cialis, Cymbalta, Trulicity, and Forteo drove a top-line beat, while improved operating led to EPS upside, and management raised 2017 revenue and EPS guidance targets slightly. The company also provided an update on its oncology R&D strategy, and while the quarter was generally received positively, one analyst downgraded the stock citing increased competition in diabetes and immunology.
  • HCA Healthcare (HCA). Lower-than-expected same-store adjusted admission and revenue/equivalent admission drove a revenue miss, causing an adjusted EBITDA and EPS miss as well. Management also lowered 2017 adjusted EBITDA and EPS guidance ranges to reflect the softer utilization trends.
  • Amgen (AMGN). AMGN beat on the top and bottom lines, and management raised 2017 revenue and EPS guidance ranges slightly, but the analyst reaction was somewhat negative as part of the revenue beat came from an inventory build-up for Enbrel (when the product would otherwise have been in line). Other products, namely Neulasta and Epogen, were impact somewhat by increased competition and pricing headwinds.
  • Express Scripts (ESRX). 2Q revenue was in line and EPS was slightly ahead of consensus, and management announced a new cost-reduction initiative. The company expects it to cost $600-$650 million in the near-term but will result in $1.2 billion in cumulative savings through 2021 (when the ANTM business comes off of the books).
  • Anthem (ANTM). 2Q revenue met estimates, while better-than-expected MLR drove an EPS beat, although share repurchases for the quarter were a bit less than what the Street had been modeling. ANTM’s cost trend is consistent with what other managed care companies have reported thus far (and with the slowing utilization that hospitals have reported). The next big issue for ANTM will be the company’s PBM RFP and when a new vendor might be selected.
  • Baxter International (BAX). 2Q revenues came in line, while better operating margin and a lower tax rate drove an EPS beat, and management raised 2017 revenue and EPS guidance ranges. The stock did struggle a bit when management set a 4% long-term revenue CAGR that was below where the Street thought it should be. However, the Street viewed the results as positive and sees ample opportunity for the company to boost growth via acquisition.
  • Integra Lifesciences (IART). Headline revenue, adjusted EBITDA, and EPS were all in line with the Street, but organic revenue growth missed badly, due largely to increased competition for IART’s DuraSeal dural repair product. Management reiterated all 2017 guidance targets, and while the stock declined sharply on Wednesday, many analysts came to its defense, noting the extent of IART’s growth acceleration opportunities in the second half.
  • Thermo Fisher (TMO). Despite a beat-and-raise quarter, the Street focused on cautious comments from management regarding slowing biopharma end market growth and decelerating bioproduction sales. The company remains bullish on the market opportunity overall and reiterated 2017 revenue growth guidance in this segment.
  • Lab Corp (LH). Total revenue was in line, but core diagnostic growth came in above expectations (offset by continued softness from the Covance business), and improved gross margin contributed to an EPS beat. Management did note a strong order book for Covance, which suggests a return to growth later this year/early next year, while core diagnostic growth guidance was raised.
  • CONMED (CNMD). Total revenue came in above consensus, largely due to strong international growth, and management raised the lower end of 2017 revenue guidance to reflect the improving performance. Gross margin was below analyst expectations, however, due to manufacturing costs and product mix, and while the company expects gross margin to improve in the second half of the year, this remains an item that concerns investors.
  • Gilead Sciences (GILD). 2Q revenue and EPS came in way ahead of consensus, led mainly by Harvoni, Sovaldi, and Truvada. While the Street remains bullish on the HCV opportunity, ABBV’s August launch could provide a slight headwind. Focus is now turning to GILD’s HIV opportunity.
  • Edwards Lifesciences (EW). US TAVR revenue grew well above Street expectations, as the Medtronic (MDT) product launch has not apparently led to meaningful market share loss for EW, leading to a meaningful top-line beat, while much improved operating margin drove EPS upside. The Street continues to debate the extent to which EW’s TAVR market share position is safe given the efforts of MDT and BSX to penetrate the US market, but EW’s place seems safe for now.
  • Varian Medical (VAR). Total revenue and oncology orders for fiscal 3Q were in line with consensus, but the key driver in the quarter was upside in Proton revenue and orders (with two orders for its new ProBeam Compact). Improved gross and operating margins led to an EPS beat, and management set a 4Q EPS guidance range that brackets the Street (although revenue is slightly below).
  • Vertex Pharmaceuticals (VRTX). Orkambi upside drove a top-line beat, while improved operating margin led to EPS upside, and management reiterated 2017 revenue guidance (but did increase R&D and SG&A guidance). The Street remains focused
  • Abiomed (ABMD). ABMD posted an in-line revenue quarter (on a difficult year-over-year comp) for its fiscal first quarter but raised full-year revenue guidance on improved Impella momentum, likely accounting for the upcoming Impella launch in Japan in September.
  • Boston Scientific (BSX). BSX beat on the top and bottom line, and management raised 2017 revenue and EPS guidance. Strong performance from the Watchman left atrial appendage device was a key highlight, and the Street is looking at the US and European TAVR launches MRI-safe labeling for CRM devices as potential upside opportunities going forward.
  • Zimmer Biomet (ZBH). 2Q revenue was in line, but EPS came in at the bottom end of the company’s pre-announced range, and management lowered both revenue and EPS guidance for the full year. The company has initiated a turnaround, with a near-term focus on fixing the manufacturing and supply issues, but finding a permanent CEO remains its top priority.
  • Celgene (CELG). Upside from Revlimid and Otezla drove a top-line beat, while improved operating margin helped deliver a solid EPS beat, and management raised 2017 adjusted EPS guidance.
  • Bristol-Myers (BMY). Revenue was slightly above consensus, driven largely by Opdivo (offset by softness in HCV), while EPS was in line. Management raised the bottom end of 2017 EPS guidance, although the stock fell under pressure due to looming competitive threats in lung cancer from AstraZeneca (AZN).
  • Align Technology (ALGN). ALGN posted another standout quarter, as clear aligner case shipments and revenue topped analyst estimates, and improving margins drove another strong EPS beat. Management also set 3Q revenue above consensus and is calling for 30%+ case shipment growth.
  • NuVasive (NUVA). Revenue was slightly below consensus (driven by a miss in US Spinal Hardware), and EPS was slightly above (largely on improved operating margin, while management reiterated 2017 guidance. The real story, however, was a significant management shakeup, as both President/COO Jason Hannon and CFO Quentin Blackford are leaving to pursue other opportunities. NUVA will therefore accelerate its organizational restructuring timeline, details of which will become clearer going forward.
  • Stryker (SYK). 2Q revenue and EPS came in a bit above the Street, and management raised 2017 organic net sales and EPS guidance. Driving the upside were Knees, Trauma, Endoscopy, and Neuro, and SYK continues to take share from ZBH in ortho reconstruction.

The Week Ahead: AACC Plus Lots More Earnings

Looking ahead, next week will again be dominated by earnings, with dozens more companies across all healthcare sectors announcing results. There are two other events of note besides earnings, however. The major trade show next week is the American Association for Clinical Chemistry (AACC) annual meeting in San Diego beginning on Sunday and running through Thursday. This expo is an opportunity for lab directors and tools/diagnostics companies to gather and showcase technologies and discuss key trends in molecular diagnostics.
In addition, Wells Fargo’s biotech team is hosting two corporate access days next week, one in Boston on Tuesday and one in San Francisco on Thursday.

Please see the table below for a preview of the key companies reporting next week. 

Earnings Release/Conf. Call June Qtr Consensus Revenue/EPS 2017 Consensus Revenue/EPS What to Look for on the Call
Incyte (INCY) Tuesday BMO, 10:00am ET $317.8 million /
$1.44 billion / ($0.75) Pipeline update, including rheumatoid arthritis and graft-versus-host disease
LifePoint Health (LPNT) Tuesday BMO,
10:00am ET
$1.64 billion /
$6.55 billion / $4.19 Color on utilization trends and broader M&A priorities
Pfizer (PFE) Tuesday BMO, 10:00am ET $13.06 billion / $0.65 $52.81 billion / $2.55 Commentary on pipeline progress, capital deployment strategy, and drug pricing
DexCom (DXCM) Tuesday AMC, 4:30pm ET $166.6 million /
$726.1 million / ($0.74) Progress on Medicare integration and thoughts on the competitive landscape
Illumina (ILMN) Tuesday AMC, 4:30pm ET $6.42.4 million /
$2.66 billion / $3.63 Color on NovaSeq installs and the order book (to give visibility into future installs); also consumables growth
ResMed (RMD) Tuesday AMC, 4:30pm ET $556.5 million / $0.07 $2.07 billion / $0.28 Commentary on the AirMini portable CPAP launch as well as on the competitive landscape
DaVita (DVA) Tuesday AMC, 5:00pm ET $3.81 billion /
$15.20 billion / $3.51 Color on the reimbursement landscape and general capital deployment strategy
Cardinal Health (CAH) Wednesday BMO, 8:30am ET $32.73 billion / $1.24 $129.7 billion / $5.35 An update on the planned China divestiture and on generic drug pricing trends
Humana (HUM) Wednesday BMO, 9:00am ET $13.60 billion / $3.08 $53.93 billion / $11.14 Color on Medicare Advantage trends and general M&A strategy with AET terminated
Glaukos (GKOS) Wednesday AMC, 4:30pm ET $39.8 million /
$165.5 million / $0.21 Color on overall MIGS adoption and thoughts on the competitive landscape
Hologic (HOLX) Wednesday AMC, 4:30pm ET $799.6 million / $0.49 $3.07 billion / $2.01 An update on Cynosure integration and color on momentum in Molecular Dx
Wright Medical (WMGI) Wednesday AMC, 4:30pm ET $178.2 million / ($0.09) $758.5 million / ($0.30) An update on sales rep headcount and how the new sales force is producing
Molina (MOH) Wednesday AMC, 5:00pm ET $4.86 billion / $0.85 $19.64 billion / $2.09 Progress on the CEO search and updated thoughts on the company’s strategic options
Globus Medical (GMED) Wednesday AMC, 5:30pm ET $150.7 million / $0.30 $625.9 million / $1.27 An update on the Exelsius Robot regulatory timeline and Alphatec revenue run-rate
Bioverativ (BVVV) Wednesday AMC, 8/3 at 8:00am ET $269.0 million / $0.71 $1.09 billion / $2.71 An update on the True North acquisition and general pipeline progress
Teva Pharmaceuticals (TEVA) Thursday BMO, 7:30am ET $5.73 billion / $1.07 $23.49 billion / $4.79 Impact of potential generic Copaxone approval and commentary on CEO search
Becton Dickinson (BDX) Thursday BMO, 8:00am ET $3.06 billion / $2.44 $12.06 billion / $9.45 Progress on the Bard transaction and updated thoughts on FX impact
Teleflex (TFX) Thursday BMO, 8:00am ET $519.0 million / $1.90 $2.08 billion / $8.16 An update on the Vascular Solutions acquisition and the overall coating portfolio
AmerisourceBergen (ABC) Thursday BMO, 8:30am ET $39.13 billion / $1.37 $155.22 billion / $5.86 Commentary on generic drug pricing trends and impact from WBA/RAD agreement
Aetna (AET) Thursday BMO, 8:30am ET $15.24 billion / $2.37 $60.93 billion / $8.98 Updated thoughts on the health exchange markets and capital deployment strategy
Allergan (AGN) Thursday BMO, 8:30am ET $3.95 billion / $3.93 $15.81 billion / $16.07 An update on pipeline products such as migraine, depression, and glaucoma
Regeneron (REGN) Thursday BMO, 8:30am ET $1.35 billion / $3.16 $5.52 billion / $12.87 An update on the Dupixent launch and pipeline progress, including Kevzara
Repligen (RGEN) Thursday BMO, 8:30am ET $31.5 million / $0.15 $131.6 million / $0.56 Color on the Spectrum acquisition and the company’s future M&A plans
Quintiles IMS Holdings (Q) Thursday BMO, 9:00am ET $1.96 billion / $1.05 $8.02 billion / $4.54 Color on the company’s plans to divest the contract sales business
Allscripts Healthcare (MDRX) Thursday AMC, 4:30pm ET $425.5 million / $0.15 $1.72 billion / $0.62 Color on the hospital spending environment given reform uncertainty
Insulet (PODD) Thursday AMC, 4:30pm ET $106.2 million / ($0.14) $436.2 million / ($0.48) Commentary on the company’s decision to go direct in Europe
Bruker (BRKR) Thursday AMC, 4:45pm ET $384.8 million / $0.20 $1.68 billion / $1.10 Color on EU order growth and trends in key end markets, namely life sciences
PerkinElmer Thursday AMC, 5:00pm ET $554.1 million / $0.67 $2.21 billion / $2.86 Commentary on the EUROIMMUN acquisition and impact on China sales
Kindred Healthcare (KND) Thursday AMC, 8/4 at 9:00am ET $1.79 billion / $0.14 $7.13 billion / $0.51 Color on asset divestiture plans and overall reimbursement environment
Cigna (CI) Friday BMO,
8:00am ET
$10.26 billion / $2.48 $41.23 billion / $9.78 Further thoughts on M&A strategy post ANTM breakup and view on exchange market
Wellcare Health Plans (WCG) Friday BMO, 9:00am ET $4.25 billion / $2.24 $16.86 billion / $6.86 Management’s thoughts on M&A opportunities

We will review these earnings reports in next week’s edition. 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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