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Whalebone Advisory provides investor relations and strategic advisory services to publicy-traded, pre-IPO, and development stage healthcare companies.
September 29, 2017

ACA Repeal is Dead, Long Live Repair?
Plus: Obama at Cantor, Clin Lab Rates Cut, ABT's Libre Approved

In a development that surprised almost no one, Senate Majority Leader Mitch McConnell chose not to even bring the Graham-Cassidy ACA repeal/replace bill to a vote once it was clear that the GOP did not have the support to pass it. After John McCain and Rand Paul bowed out, all eyes shifted toward fence-sitters like Lisa Murkowski and Susan Collins, whom bill sponsors attempted to woo via increased Medicaid funding. However, Collins on Monday officially announced her opposition to the bill, thus representing the third Republican “no” vote and effectively killing the bill.
With the deadline to pass a reform measure via budget reconciliation upon us, the repeal/replace option is officially over. While lawmakers are shifting their attention to tax reform, which the GOP leadership is determined to pass before the end of the year, those working on healthcare can finally focus on the ongoing bipartisan effort to repair the exchanges that is being led by Lamar Alexander and Patty Murray. Even President Trump finally admitted that a bipartisan bill is the only reasonable pathway at this stage (although only once it was clear that repeal/replace, one of his signature campaign promises, was finally dead). In an interview on Thursday, he claimed there are the votes to pass a bipartisan bill, although that would most likely take place in early 2018.
In the meantime, Wednesday was also the deadline for health insurers to declare their intentions to offer health plans through the exchanges in 2018. While a number of insurers have decided to pull out of many, if not all, markets, it was reported that virtually every county will have at least one insurance plan available. However, approximately half of all counties will have only one plan, and 30% will have two. As a result, many counties have significant premium increases in order to encourage insurers to participate.
To this end, Trump announced he is considering signing an executive order to allow individuals to purchase health insurance across state lines. The idea is to promote increased competition and, therefore, lower premiums. However, several states already allow this, and very few insurers actually want to do this. First, healthier people will flock to cheaper plans in other states, with sicker people stuck in plans that would now have fewer healthy people to keep premiums at reasonable levels. Second, it is logistically difficult for insurers to build out provider networks in markets they current do not serve, so it is not clear how convenient it would be for people to purchase a plan from another state. Finally, each state has its own laws and regulations governing insurance plans, so it remains unclear how the executive order would deal with differing state insurance regulations.
So, the ACA moves forward as presently constituted, with the problems plaguing the exchanges only getting worse via further skyrocketing premiums. A bipartisan effort is definitely a more plausible and reasonable approach, but the President’s “January or February” timeline is far from a certainty. How Congress manages the tax reform process currently on its plate will go a long way toward determining the probability of success of the ACA “repair” process and whether early 2018 is a realistic timeline.

Obama Calls for Fixes to ACA, Smarter Drug Pricing Policy

As we previewed last week, President Obama delivered the keynote address at the Cantor Fitzgerald Global Healthcare Conference, which we attended. Obama reiterated his rationale behind the ACA but acknowledged that the law has shortcomings and expressed openness to improving upon the law (stating that he has “no pride of authorship”). To Obama, one of the biggest problems is with the people at the margins – those who do not qualify for Medicaid, do not get employer-sponsored health insurance, and who are not receiving sufficient subsidies to afford to purchase insurance. These are the people he wishes Congress would focus on in pursuing a repair bill. He applauded the Alexandar/Murray-led bipartisan process and proposed four fixes he believes would improve the current system:

  • Provide financial incentives for all states to expand Medicaid, which he estimates would reduce the number of uninsured by another four million or so.
  • Use the cost savings from the ACA to provide more tax credits to middle-income families to purchase insurance through the exchanges.
  • In markets without enough insurers to create a competitive market, the government could step in and offer affordable plans (similar to the GOP-created Medicare Part D drug benefit program).
  • Enable states to manage their own Medicaid systems if they can do so more easily and affordably.

Ultimately, Obama believes that much of the current debate is more about politics than actual healthcare policy, and he called on both parties to set aside politics and enable the marketplace to succeed. He said he would be proud to support any bipartisan effort that actually improves upon the ACA, which he contended was a first step, not a perfect solution.
He also weighed in on the notion of a single-payer system, which Democrats are increasingly discussing as a possible litmus-test issue for candidates in the 2020 election cycle. While he thinks that single-payer is a good idea in principle and can work under the right circumstances, he does not believe it is realistic in our present situation. Healthcare in the United States is structured as an employer-based system, so uprooting legacy systems would meet with extraordinary resistance and would be enormously disruptive. The debate should continue, he said, but proponents will have to demonstrate how such a plan could be implemented and financed, and they have not yet done so.
Obama also addressed the issue of drug pricing. In his view, there should be a way to figure out how to continue to incentivize the development of risky drugs that are difficult to develop and/or secure approval while also ensuring that drugs that have been on the market for a while are priced appropriately. Annual double-digit pricing increases will make it difficult for employers to continue to provide drug coverage for employees. He proposes to allow for some negotiation of drug prices for those that have been on the market for a while and where returns for the drug makers have been significant (although obviously there would need to be clear definitions of “a while” and “significant”). Obama also stressed the need to reform protocols for how FDA approves new drugs, an area of government bureaucracy he deemed as among the most in need of fixing. By speeding up the process, drug company could reduce investment costs on the front end and improve batter averages (since troubled processes would end sooner).

CMS Proposes 10% Cut to 2018 CLFS; DGX, LH Call For Recalculation

CMS published its proposed 2018 Medicare payment rates under the Clinical Lab Fee Schedule (CLFS), calling for cuts of around $670 million under the Protecting Access to Medicare Act of 2014 (PAMA). This translates to a cut of around 10%, much worse than the roughly 5% that the Street was expecting. There is a public comment period through October 23, after which CMS may makes adjustments to the proposed rates. But, in the meantime, the headline served as material negatives for clinical lab companies, most notably Quest Diagnostics (DGX) and LabCorp (LH).
Both companies published responses to the proposed rule, each expressing disappointment in the draft and calling for a re-examination of the data behind the rate determinations. DGX stated it would explore all possibilities, including litigation or legislative relief, if necessary, and LH demanded a delay in implementation to allow CMS to go back and correct all flaws in its analysis. For example, LH claims that CMS focused mostly on independent labs and did not include physician office labs and hospital labs in its rate determination. Therefore, in conjunction with the American Clinical Laboratory Association (ACLA), all lab companies are demanding material adjustments to the proposed rates.
From the Street perspective, the potential impact to DGX and LH are mixed, as out-year forecasts could be impacted by these greater-than-expected rate cuts, but both companies are also diversified enough to help mitigate some that of that negative impact. The full brunt of price declines would hit in 2019 and 2020, so the question will be how the company respond and what steps they may take to further minimize these cuts. From this standpoint, the Street is modestly more positive on LH’s more diversified business that DGX, particularly LH’s CRO segment.

In Other News: ABT's Libre Wins Approval;
GE Launches Competitor to RGEN; AGN's CFO to Retire

Abbott (ABT) on Wednesday announced that the FDA has approved its FreeStyle Libre Flash Glucose Monitoring System, which is the first CGM that enables adult diabetes patients (18+) to measure blood glucose levels and make treatment decisions without having to draw blood via the fingertip. Rather than a fingerstick test, the Libre CGM uses a subcutaneous sensor wire to measure and monitor glucose levels on a continuous basis, and a mobile reader informs the patient how levels are changing and what to do about levels that are either too high or too low. The approval includes a dosing claim, which could make Libre more of a competitive threat to market leader DexCom (DXCM), which saw it shares plummet by 33% on Thursday in response to the news.
ABT has experienced unexpected success with Libre in Europe, which is already being used by around 400,000 patients, far above what the Street thought was possible by this point. The European ramp has analysts and investors excited about a similar uptake level in the US once the product launches here, likely by December. DXCM is likely to remain the market leader following the Libre launch, but the Street expects Libre to take some share, especially early on through patient trialing, but Libre also presents the opportunity to expand the CGM market more meaningfully.
As we discussed over the summer, Bigfoot Biomedical has selected Libre for its fully-integrated closed-loop system, which already added significant validation and credibility to ABT’s CGM. Bigfoot’s system, which will include both an insulin pump and a smart pen, presents as a legitimate eventual competitor to Medtronic’s (MDT) MiniMed 670G closed-loop system that launched earlier this year. In addition to being the only system that will have both a pump and a smart pen when it launches (possibly late 2019 or 2020), the Bigfoot system will also integrate directly with the patient’s smartphone to deliver real-time data and alerts on glucose and insulin levels.
In terms of DXCM, the stock decline was exacerbated by several analyst rating downgrades and price target reductions, which were mostly in response to the earlier-than-expected approval and unexpected inclusion of a dosing claim. However, several analysts remain positive on the long-term story given DXCM’s pipeline, Medicare coverage in 2018, and prospects for market expansion.
Repligen (RGEN) shares declined sharply this week on the news that GE plans to launch a new protein A resin in 2018 that will be manufactured either in-house or by a supplier that is not RGEN. RGEN has enjoyed a near monopoly in the protein A ligand market, and the product represented roughly 50% of total revenue as recently as 2015. Through several recent acquisitions, including this year’s Spectrum deal, the Street is forecasting protein A mix to decline to around 25% in 2018, so the company has worked hard to diversify away from protein A and become more of a player in bioprocessing.
In terms of the GE relationship, RGEN still has long-term supply agreements with GE (by far its largest protein A customer) and others (including Millipore), but the potential loss of this revenue stream could have a longer-term financial impact, although perhaps at the margins as the company continues to build out its other segments. The company is hosting an investor day in New York today, and while the event will focus more on bioprocessing, management will most likely devote some time to addressing this news and discussing the short- and longer-term potential impacts.
Finally, Allergan (AGN) on Monday announced that CFO Tessa Hilado plans to retire but will stay in the position until a successor is named. Hilado has held the role since joining AGN in late 2014 after holding senior finance roles at several other companies, including PepsiCo, Schering-Plough, and General Motors. AGN also announced that its Board has authorized an additional $2 billion share repurchase program and reiterated its commitment to annual dividend increases and to pay down $3.75 billion of debt in 2018.

The Week Ahead: 4Q Kicks Off With RGEN, MNK Investor Days; Cowen Conferences; World Dental Federation Congress and EuroSpine

With the quarter now over, many companies enter a quiet period until they report earnings over the next few weeks. However, there are several more events next week in what is a continuation of the busy calendar. Besides the RGEN Analyst Day today, which we discussed above, the World Dental Federation Congress also commences today in Madrid and runs through the weekend. The event will include clinical sessions and presentations on advances in dentistry and overall oral health. The other major trade show next week is EuroSpine, which takes place on Thursday through Saturday in Berlin and will feature product showcases from all major spine players.
Cowen is hosting two investor conferences next week: its 20th Annual Therapeutics Conference on Monday and Tuesday and its 6th Annual Medtools Unlocked Conference on Wednesday, both in New York.
Mallinckrodt (MNK) is holding an Investor Briefing for its Specialty Brands Pipeline on Wednesday in New York. The event will focus on the segment’s pipeline development assets and commercial portfolio and will also include scientific and poster presentations by company leaders and special guests.
Please see the calendar below for a comprehensive look at key events in healthcare through the end of October, including an updated look at the September quarter earnings season. As always, we welcome all feedback, and have a great weekend and an easy fast for those celebrating Yom Kippur!


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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