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Whalebone Advisory provides investor relations and strategic advisory services to publicy-traded, pre-IPO, and development stage healthcare companies.
August 4, 2017

It Looks Like Congress May Try Bipartisanship After All;
Plus: Earnings Season Marked By Soft Volumes, Drug Pricing Headwinds, M&A

A week after John McCain’s dramatic “no” vote that effectively ended the Sentate’s effort to repeal the Affordable Care Act (ACA), questions abound regarding what comes next. While some Republicans are anxious to move on to other issues, namely tax reform, a growing chorus within the Republican party wants to keep at it or risk failing completely on one of the party’s signature campaign promises. A prominent example is White House Budget Director Mick Mulvaney, who insisted this week that the Trump Administration is still committed to finding a workable solution.
So, while there appears to be a will, it is not entirely clear yet if there is a way. As we discussed last week, it seems that the most logical path forward would be a bipartisan effort, and it now appears that that may be in the works. Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) are planning to announce a bipartisan working group to commence a new effort, including hearings of the Senate Health Committee. Senators Bill Nelson (D-FL) and Susan Collins (R-ME) have formed their own bipartisan group, as well.
The other consideration driving these new efforts is that passing repeal/replace legislation via budget reconciliation is almost entirely off the table (given that Congress is set to begin working on the fiscal 2018 budget sometime next month). Despite President Trump’s call for a change in Senate rules to eliminate the filibuster, that is unlikely to occur (even Mitch McConnell thinks so). Therefore, a bill will need a filibuster-proof 60-vote majority to pass, and neither party can come close to achieving that level of support on its own.
With budget reconciliation no longer a factor, there is not necessarily a fixed timeline for when legislation needs to be passed. While campaigning for next year’s midterm elections will create a natural end date sometime next spring or summer, it seems clear that Republicans in the House and Senate will need at least one major legislative achievement on which to run. Passing a bipartisan repeal/replace bill may not quite have the teeth of a GOP-only effort, it appears that more of them believe that any bill that eliminates the ACA (no matter how many components remain in place) is better than leaving it intact.

In Other News: LH, ATHN, CVS 

Besides the continuation of earnings season (see discussion below), there were a few other notable news items this week. First, LabCorp (LH) on Monday announced that it is acquiring Chiltern, a privately-held CRO, for $1.2 billion in cash. This purchase price represents a multiple of roughly 13x 2017 EBITDA, which is a lower multiple than other recent CRO transactions (including Parexel, which was taken out at around 14x).
The Street was generally positive on the deal, as it is expected to add scale to Covance’s late-stage clinical development portfolio. LH has struggled with Covance since acquiring it in 2014, and management has stated that shoring up its CRO business is among its top priorities. The Street had feared that LH might consider a much larger CRO acquisition, so this relatively smaller deal should satisfy LH’s CRO strategy.

AthenaHealth (ATHN) announced on Tuesday that it has commenced a strategic review of the company’s leadership, governance, and operating and financial strategy. Management has already identified $100 million in cost-reduction opportunities and is working to find more in order to improve efficiency and boost operating margin. ATHN also continues to search for a new CFO and has established the new role of President to oversee the execution of the new strategy and report directly to CEO. The company will provide more detail when it reports third quarter earnings results in late October.
CVS Health (CVS) and Express Scripts (ESRX) this week both unveiled their formularies for 2018. ESRX for the first time included a requirement that, to be included in the formulary, branded drug makers must offer meaningful cost savings if there are lower-cost options that are clinically equivalent. With PBMs under increased scrutiny for their role as a key supply chain contributor to rising drug prices, the Street expected ESRX to take a more aggressive approach to finding a balance between clinically necessary drugs and providing value to customers.
Similarly, CVS made value-based care a central theme in its revised formulary, although it did not exclude nearly as many branded drugs as ESRX. CVS expects its new strategy to generate more than $13 billion in cumulative client savings while ensuring that more than 99% of members are able to keep their current therapies. The company also introduced its Transform Value program which provides care management services to patients in such categories as oncology, obesity, and respiratory ailments.

Earnings Review: Questions Remain About Utilization and Generic Drug Pricing

This was another hectic earnings week with mixed results. We continued to see soft utilization trends from hospitals, which meant positive results for some managed care (most notably AET and HUM, less so for MOH). Several companies posted stellar results, particularly DXCM and ILMN, while others reported company-specific misses/guidance reductions, including HOLX, CAH, and TEVA. We review key results below (in the order of conference call):

  • Merck (MRK). Revenue and EPS topped the Street, and management raised 2017 revenue guidance (while reiterating EPS guidance). Key drivers of the upside were Keytruda, Zetia, and Gardasil.
  • Hill-Rom (HRC). Fiscal 3Q revenue came in below expectations, due mostly to lower Rental revenue (largely third-party equipment and the timing of certain Asia-Pacific orders), while EPS was in line. Management lowered both revenue and EPS guidance for FY 2017 as the company winds down the third-party rental business.
  • AbbVie (ABBV). 2Q revenue and EPS were largely in line, and management reiterated 2017 guidance. The highlights of the quarter were continued strength from Humira and Imbruvica, and the company expects Humira to continue growing mid-to-high teens in 2017.
  • LifePoint Health (LPNT). Consistent with what we have seen from other hospital companies this quarter, LPNT reported a 2Q revenue shortfall on weaker-than-expected volume growth. Improved margins drove an EPS beat, but management still lowered 2017 revenue, adjusted EBITDA, and adjusted EPS guidance.
  • Pfizer (PFE). PFE posted a mixed quarter, with in-line revenue but above-consensus gross margin (due in part to the Hospira infusion divestiture) that drove a slight EPS beat. Strength in Enbrel, Xeljanz, and Ibrance were offset somewhat by relative softness in Prevnar and Lipitor. Management reiterated 2017 revenue guidance but slightly increased EPS guidance on improved margins.
  • DexCom (DXCM). 2Q revenue came in ahead of the Street as both hardware and sensors beat analyst estimates. Medicare sales are expected to begin contributing meaningfully in 4Q, while there remains a competitive overhang from MDT’s MiniMed 670G and the coming launch of Abbott’s (ABT) Libre sensor. The company also announced that Quentin Blackford, who recently stepped down as CFO of NuVasive (NUVA), will assume the role of CFO beginning in September.
  • Illumina (ILMN). ILMN posted a strong beat-and-raise quarter as the company saw strong demand for NovaSeq with installs well above consensus. Service revenue also contributed to the beat, and management raised 2017 revenue guidance as a result. EPS guidance was unchanged as management pointed to increased investment in growing the top line.
  • ResMed (RMD). Fiscal 4Q revenue came in slightly below the Street, and better-than-expected margin drove an EPS beat. Street reaction to the results was mixed (with one analyst upgrade and one downgrade), but overall sentiment remains slightly negative as some on the Street are concerned about the sustainability of revenue growth.
  • DaVita (DVA). 2Q revenue and EPS were slightly ahead of consensus, and management raised the raised the bottom end of 2017 operating income guidance, driven entirely by better expected performance in Kidney Care. However, the stock declined sharply on continued softness in DMG and management’s reminder of numerous headwinds in 2018, including cost inflation continuing to outpace reimbursement rate increases.
  • Cardinal Health (CAH). Fiscal 4Q revenue was in line with analysts, while favorable tax rate drove a slight EPS beat. The real news was the reduction in FY 2018 guidance (initially set in April with the MDT Supplies unit acquisition). Management cited several discrete items related to the MDT acquisition to account for the $0.22 guidance reduction, and the Street generally views these as company-specific, as opposed to macro-based, issues.
  • Obalon (OBLN). In the second quarter following commercial launch, revenue slightly exceeded Street expectations as the company saw better-than-expected re-orders from customers, including several accounts ordering multiple balloons. Gross margin improved on the higher sales run-rate, and OBLN continues to invest in its pipeline, including a nextgen system designed to replace the fluoroscopy with its own embedded navigational tracking technology.
  • Humana (HUM). Better-than-expected Medicare Advantage enrollment and improved medical loss ratio drove a strong EPS beat, while a much smaller-than-feared reduction in Star ratings prompted an increase in 2017 EPS guidance and sets the stage for a stronger 2018. HUM will now have 4-Star ratings for 74% of its MA plans (down from 78%) as opposed to the 37% previously guided.
  • Glaukos (GKOS). 2Q revenue came in ahead of consensus, and management reiterated 2017 revenue guidance despite the emergence of Novartis’ (NVS) CyPass, which recently secured a reimbursement code. The company also set 3Q revenue guidance slightly below the Street, cautioning that commercial insurers may not have updated their fee schedules quickly enough to correspond to the higher Medicare rate as recently updated in the physician fee schedule.
  • Hologic (HOLX). Fiscal 3Q was a mixed quarter for HOLX, as continued strength in molecular diagnostics and international breast health offset continued softness in US breast health (due to a slowdown in 3D system placements) and uneven Cynosure results. Management lowered FY 2017 revenue guidance (essentially fiscal 4Q guidance) to account for a seasonally weak medical aesthetics and hospital capital equipment spending quarter.
  • Wright Medical (WMGI). 2Q revenue was slightly ahead of the Street, while adjusted EBITDA came in well ahead of consensus, and management reiterated 2017 revenue, adjusted EBITDA, and adjusted EPS guidance. The stock reacted very positively as the Street had been bracing for a weaker performance; these results and reaffirmed guidance give confidence that the story is stable and positioned for growth acceleration heading into 2018.
  • Molina (MOH). 2Q weak results were overshadowed by management’s restructuring plan calling for a streamlined organizational structure and a review of vendor contracts to reduce annual expenses by $300-$400 million. The company also pulled 2017 guidance due to a soft 2Q, uncertain medical cost trends in several states, and uncertainty surrounding the exchange market cost-sharing subsidies.
  • Globus Medical (GMED). GMED posted a 2Q revenue and EPS beat, and management reiterated 2017 guidance. The addition of new sales reps in the US contributed to the revenue upside, while the company continues to await FDA clearance of its Excelsius robot system, slated to launch sometime in the second half.
  • Teva Pharmaceuticals (TEVA). TEVA shares were hammered following a 2Q revenue and EPS miss, a 75% dividend cut, and a reduction to 2017 revenue, EBITDA, and EPS guidance. The source of the miss was continued weakness in the generics business, and management indicated a new focus on cost-cutting and exploring asset divestitures.
  • Becton Dickinson (BDX). Softness in US Medical Systems caused a fiscal 3Q top-line miss, offsetting upside in Life Sciences, while EPS came in ahead and management raised FY 2017 EPS guidance. Investor focus remains on the timing of the Bard transaction close and the associated synergy opportunities.
  • Teleflex (TFX). Posted a top- and bottom-line beat, and management raised 2017 reported revenue and EPS guidance. The keys going forward are the move to a direct sales model in China and synergies from the VASC acquisition.
  • AmerisourceBergen (ABC). Fiscal 3Q revenue was in line, and a significant tax benefit drove an EPS beat. Management raised the low end of 2017 EPS guidance but lowered revenue growth guidance due to continued generic drug price erosion.
  • Aetna (AET). 2Q revenue and EPS beat the Street as medical loss ratio came in better than expected on both the commercial and government sides. Enrollment was a bit lower than expected, but management raised 2017 EPS guidance even in light of continued investment spending to boost growth and possible medical cost trend increases later this year.
  • Allergan (AGN). AGN posted a beat-and-raise quarter as O-US sales led the way, and management raised 2017 revenue and EPS guidance. Medical Aesthetics, largely due to the first full quarter of Zeltiq, was a key driver, and the Street remains focused on the company’s emerging pipeline opportunities.
  • Regeneron (REGN). Strong Eylea sales and a solid early Dupixent launch drove a 2Q revenue beat, while improved operating margin led to a large EPS beat. Management increased Eylea revenue guidance, while the Street remains focus on Dupixent going forward.
  • Repligen (RGEN). RGEN posted a solid revenue and EPS beat, driven by above-market growth in bioproduction as well as a strong rebound in Protein A ligands. Management raised 2017 guidance to reflect the recently-closed Spectrum deal, which is expected to add $17-$18 million in incremental revenue for the remainder of the year.
  • Allscripts Healthcare (MDRX). MDRX posted an in-line quarter with bookings well ahead of expectations. The company also announced the acquisition of McKesson’s (MCK) Enterprise Information Solutions business, which gives MDRX increase scale among hospital customers but also additional balance sheet leverage.
  • Insulet (PODD). Strength in US and O-US Omnipod sales drove a top-line beat, and management set 3Q revenue guidance ahead of consensus while also raising 2017 revenue guidance. The Street’s focus remains on the split with Ypsomed and the company’s plans to go direct in Europe next year.

The Week Ahead: Increased Investor Events with Earnings Winding Down

Earnings season continues next week, although with the bulk of healthcare companies having reported over the last three weeks, the calendar is significantly lighter this week. In addition to the remainder of earnings, there are number of other major events. The American Academy of Diabetes Educators (AADE) convenes its annual meeting this weekend in Indianapolis, where Abbott (ABT), DexCom (DXCM), Johnson & Johnson (JNJ), Medtronic (MDT), and Insulet (PODD) will showcase products.
With earnings season winding down, these next two weeks also represent a good opportunity for companies and banks to schedule investor events before things die down for the vacation period during the last two weeks of August. Allscripts Healthcare (MDRX) hosts its Client Experience Investor Event in Chicago on Tuesday. Among the topics on the Street’s mind is where the company is in its process of searching for a permanent CFO.
Several banks are hosting corporate access events next week. Needham on Tuesday is holding its 2nd annual Med Tech 1x1 Conference in Boston, featuring Cantel Medical (CMD), Cardiovascular Systems (CSII), Haemonetics (HAE), Hill-Rom (HRC), Hologic (HOLX), LeMaitre Vascular (LMAT), Merit Medical (MMSI), MiMedx (MDXG), and Wright Medical (WMGI). In addition, Canaccord Genuity will host its 37th Annual Global Conference in Boston on Wednesday and Thursday, while UBS puts on its Genomics 2.0 Summit in Park City, UT from Wednesday through Friday.
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
Horizon Pharma (HZNP) Monday BMO, 8:00am ET $237.1 million / $0.10 $991.7 million / $0.82 An update on the Ravicti patent challenge and plans for the Primary Care business.
Luminex (LMNX) Monday AMC, 4:30pm ET $75.5 million / $0.14 $306.6 million / $0.70 Color on the Aries C. difficile assay opportunity and an update on the Atlas trial
Nevro (NVRO) Monday AMC, 4:30pm ET $74.9 million / ($0.29) $316.9 million / ($0.97) More color on guidance and sales force hiring following the July pre-announcement
Diplomat Pharmacy (DPLO) Monday AMC, 5:00pm ET $1.13 billion / $0.16 $4.56 billion / $0.65 Color on the rare disease/orphan drug pipeline and possible AMZN entry
Envision Healthcare (EVHC) Monday AMC, 8/8 at 8:30am ET $1.96 billion / $0.80 $7.96 billion / $3.45 An update on AMR sale talks and broader M&A strategy
Tenet Healthcare (THC) Monday AMC, 8/8 at 10:00am ET $4.90 billion / ($0.16) $19.76 billion / $1.17 Color on further divestiture plans and the impact of the HUM contract
Valeant Pharmaceuticals (VRX) Tuesday BMO, 8:00am ET $2.23 billion / $0.94 $8.76 billion / $3.59 Plans on further debt reduction/restructuring and a pipeline update
CVS Health (CVS) Tuesday BMO, 8:30am ET $45.35 billion / $1.31 $184.19 billion / $5.87 An update on cost-cutting and potential impact from the WBA/RAD deal
Endo International (ENDP) Tuesday BMO, 8:30am ET $832.7 million / $0.72 $3.50 billion / $3.54 Commentary on the voluntary decision to remove Opana ER from the market
Mallinckrodt (MNK) Tuesday BMO, 8:30am ET $829.8 million / $1.73 $3.31 billion / $7.54 Color on broad M&A strategy to diversify away from Acthar
Zoetis (ZTS) Tuesday BMO, 8:30am ET $1.26 billion / $0.53 $5.19 billion / $2.33 Commentary on overall animal health trends in light of Bayer and Lilly reaults
Henry Schein (HSIC) Tuesday BMO, 10:00am ET $3.05 billion / $1.74 $12.25 billion / $7.28 General overview of dental market trends and XRAY distribution deal
The Advisory Board (ABCO) Tuesday AMC, 4:30pm ET $196.1 million / $0.44 $808.7 million / $1.98 Likelihood of remaining independent or splitting into two pieces and being sold
Jazz Pharmaceuticals (JAZZ) Tuesday AMC, 4:30pm ET $410.3 million / $2.75 $1.65 billion / $11.01 A pipeline update, including Vyxeos and Xyrem
Myriad Genetics (MYGN) Tuesday AMC, 4:30pm ET $193.7 million / $0.27 $764.8 million / $1.02 An update on the pipeline and integrations of Assurex and Sividon
Penumbra (PEN) Tuesday AMC, 4:30pm ET $77.2 million / ($0.03) $317.8 million / ($0.13) Color on the 3D stent retriever recall and the competitive landscape
Surgery Partners (SRGY) Tuesday AMC, 8/9 at 8:30am ET $315.6 million / $0.17 $1.27 billion / $0.59 Thoughts on future M&A plans and color on overall utilization trends
Charles River Laboratories (CRL) Wednesday BMO, 8:30am ET $458.5 million / $1.22 $1.83 billion / $5.10 Commentary on CRO/CMO consolidation and overall drug pricing trends
LivaNova (LIVN) Wednesday BMO, 9:00am ET $314.3 million / $0.82 $1.23 billion / $3.11 Plans for the Caisson acquisition and color on future M&A strategy
Dentsply Sirona (XRAY) Wednesday BMO, 8:30am ET $999.8 million / $0.65 $4.02 billion / $2.84 Management color on global dental utilization trends and interest in capital equipment
NxStage Medical (NXTM) Wednesday BMO, 9:00am ET $96.5 million / ($0.03) $400.7 million / ($0.02) Commentary on trends in centers offering HHD and competitive landscape
Mylan (MYL) Wednesday BMO, 10:00am ET $3.02 billion / $1.17 $12.47 billion / $5.17 Color on generic drug pricing environment and generic volume trends
Perrigo (PRGO) Thursday BMO, 8:00am ET $1.18 billion / $0.92 $4.77 billion / $4.28 A pipeline update and color on volume trends

We will review these earnings reports in next week’s edition. Please see the calendar below for a comprehensive look at key events in healthcare over the next few weeks. 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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