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Whalebone Advisory provides investor relations and strategic advisory services to publicy-traded, pre-IPO, and development stage healthcare companies.
October 6, 2017

HC Reform Taking Backseat to Taxes, Gun Control;
Plus: Copaxone Goes Generic, JNJ Exiting Diabetes

First, an announcement: this will be the final edition of Street Smarts under the Whalebone Advisory name. Beginning next week, we are joining LifeSci Advisors and intend to continue this newsletter under the LifeSci banner and possibly with a new format. Please stay tuned. In the meantime, thank you very much for your support and readership. We look forward to continuing to make this newsletter a tool to help distill the overwhelming flow of news into what the Street is focusing on and to provide context behind what is driving prevailing market sentiment.
With the ACA repeal/replace process officially dead, momentum continues to build for the burgeoning bipartisan effort to stabilize the exchanges and find ways to reform Medicaid, although there is no draft legislation yet to review. This week was marked by two far more significant stories that pushed healthcare reform off of the front page.
Chronologically, the first was the resignation of HHS Secretary Tom Price following the revelation that he had used private planes for government travel at taxpayer expense. While many of these trips had been approved by HHS officials, the optics were horrendous, particularly a private jet trip from Washington to Philadelphia for which there are numerous less costly alternatives. Price’s successor has not yet been announced, but among the leading contenders is FDA Commissioner Scott Gottlieb, who has won plaudits for his early work at the FDA. CMS Administrator Seema Verma has also been mentioned as a candidate.
The near-term implication is the extent to which the HHS will continue to support the individual exchanges via cost-share subsidies (CSR). Some states have attributed the spike in insurance premiums to the Trump Administration and the Price-led HHS due to their unwillingness to commit to CSRs over the long term. As a result, many insurers chose to exit entire states, leaving many markets with only one insurance option. With no competition, therefore, these markets are seeing premium increases of 20-30% for 2018. Both Gottlieb and Verma are on record as opposed to the ACA, but how they (or any other candidates) would handle CSRs remains unclear.
The far more significant story this week was the horrific and unconscionable mass shooting in Las Vegas, leaving 59 dead and more than 500 injured. While the House managed to pass a budget, and debate continues on tax reform, much attention has shifted to gun control. Both the NRA and several Republicans expressing support for a potential ban on bump stocks, which enabled the gunman to fire hundreds of rounds a minute with his semi-automatic weapons. It is unclear at this point if Congress will use the increased momentum on this topic to move on some sort of gun control legislation, but it appears that healthcare is just one of several priorities, as opposed to being the top priority.
With the 2017 budget reconciliation deadline passed and the 2018 exchange markets set, there appears to be less urgency now to get a reform bill done immediately. Lawmakers do want to get something done to have as campaign fodder in the midterms next year, but tax reform and now possibly gun control are on the agenda, as well. We may see a draft bipartisan bill in the next couple of weeks, but we imagine there will be plenty of debate and hearings to go along with it, so Trump’s estimate of January or February to pass a bill may even be optimistic.

Biopharma News: TEVA Hit By Generic Copaxone;
AMGN/RGEN Still Battling Over PCSK9; MNK Highlights Pipeline

The biggest story in biopharma this week was the news that the FDA has approved Mylan’s (MYL) generic version of Teva’s (TEVA) multiple-sclerosis drug Copaxone several months earlier than expected. The news was a significant positive for MYL, which analysts estimate can achieve 30-40% share of the larger 40mg dosage market (a $3 billion+ market opportunity) and 20-25% of the ~$800 million 20mg dosage market. Furthermore, the Street expects MYL to price its generic version at up to a 40% discount to TEVA’s Copaxone pricing.
TEVA analysts and investors are now focused on how many additional potential competitors may enter this market, thus further eroding TEVA’s revenue opportunity, both in terms of volume and the lower pricing that TEVA will be forced to match. This will undoubtedly have a material impact on TEVA’s 2018 guidance, which will also be negatively impacted by the sale of Paraguard intrauterine device to Cooper Companies (COO) that TEVA management has not yet incorporated into guidance. Therefore, new CEO Kare Schultz’s first earnings call in early November will indeed be eventful.
A Federal Circuit court on Thursday vacated the previously-issued permanent injunction on sales of Regeneron’s (RGEN) PCSK9 drug Praluent. Amgen (AMGN) had previously sued to have Praluent sales banned in the U.S., and after a 30-day ban, a Federal Circuit court issued a stay on the permanent injunction, pending appeal. The Court on Thursday ordered a new trial, ruling that the District Court erred in granting the permanent injunction. While this decision was not entirely unexpected, the longer-term implication on AMGN is more from a pricing standpoint. AMGN would have had greater pricing power with the only PCSK9 drug on the market, but with REGN back in the game, insurers will have more leverage to negotiate lower prices.
Mallinckrodt (MNK) on Wednesday held an investor briefing in New York at which it outlined its long-term R&D pipeline in a broad effort to diversify away from the company’s cornerstone product, Acthar. Management highlighted its Inomax platform for hypoxic respiratory failure and believes it can withstand competitive pressure from Praxair, particularly in Canada. In terms of the pipeline, the company believes that key products in development can generate more than $1 billion in peak sales at improved margins over time, giving MNK an opportunity to buttress its Acthar franchise with meaningful portfolio enhancements. Management also hinted that it may consider selling its generics business at some point in the future.

Medtech News: JNJ Shuts Down Animas;
XRAY Shakes Up Management Team; BSX Beefs Up EP Portfolio

Johnson & Johnson (JNJ) announced in January that it was conducting a strategic review of its diabetes business, and on Wednesday, the results of that strategic review process became known: JNJ will shut down its Animas line of insulin pumps and exit that market altogether. JNJ had controlled roughly 10-15% share of the U.S. pump market, far behind industry leader Medtronic (MDT) and battling with smaller players Insulet (PODD) and Tandem Diabetes (TNDM). Given its relatively small market share, JNJ had struggled with profitability in this segment, and rather than invest further, it opted for a more prudent route by cutting its losses and focusing its efforts elsewhere.
In terms of the diabetes market, MDT is viewed as a clear winner, particularly with its pump being such a significant part of its integrated MiniMed 670G closed-loop system. MDT was also selected by JNJ to provide transition services for its Animas patients, including customer ordering and supplies shipments, providing a boost to MDT’s diabetes business that has stumbled somewhat in recent quarters. PODD and TNDM are also likely to see incremental boosts to their sales as it is unlikely that MDT captures all 90,000 of JNJ’s patients.
One potential loser here is DexCom (DXCM), which had partnered its continuous glucose monitor (CGM) with the Animas pump. While the Street expects most DXCM CGM users to remain with DXCM, those DXCM patients who use an insulin pump may consider an alternative CGM/sensor provider, especially if many of them migrate over to MDT. This incremental negative continues the difficult run for DXCM, which saw its shares reduced by a third last week following the approval of Abbott’s (ABT) Libre CGM.
XRAY has underperformed since Dentsply and Sirona completed their merger in February 2016. Part of the underperformance stems from the continued weakness in the global dental market as utilization has remained soft for the last several quarters. This has also impacted capital equipment sales, such as XRAY’s CEREC CAD-CAM system, although there have also been disruptions resulting from the conclusion of XRAY’s exclusive distribution agreement with Patterson (PDCO). Beyond the macro challenges, however, the two companies have not fit well together, and so investors wanted to see the departures of the primary dealmakers, Slovin and Wise. Thierer was formerly the CEO of the PBM Catamaran until its sale to United Healthcare’s (UNH) OptumRx, so he is a candidate for the permanent job. The Street will want fresh blood in that seat, and investors should not be surprised to see the new CEO reset expectations via a guidance reduction (or at least the setting of 2018 guidance below Street consensus). The stock could therefore experience continued pressure until the new team is firmly in place and the new strategy is better known.
Boston Scientific (BSX) this week announced another tuck-in acquisition, this time privately-held Apama Medical for $175 million in upfront cash and up to another $125 million in milestone payments. Apama makes a radiofrequency balloon used to treat atrial fibrillation. The balloon is equipped with cameras to enable the physician to adjust the amount of energy delivered to the balloon in order to optimize the ablation. Data from Apama’s first-in-man study have been promising, with the device meeting its primary safety endpoint and generating no device- or procedure-related adverse events. BSX hopes to secure a CE Mark for the product in late 2018 and then launch a U.S. pivotal trial, making FDA approval a possibility in 2021.
Finally, three previously announced transactions closed this week: Allscripts’ (MDRX) acquisition of McKesson’s (MCK) Enterprise Information Solutions business, Teleflex’s (TFX) purchase of NeoTract, and Integra Lifescience’s (IART) of JNJ’s Codman Neurosurgery business following the sale of some neurosurgery assets to Natus Medical (BABY).

The Week Ahead: Calm Before the Earnings Storm

Next week is relatively quiet with earnings season kicking off the following week. Barclays is hosting its Fifth Annual Generic Pharmaceuticals and Biosimilar Symposium on Tuesday, Oppenheimer is holding its Specialty Pharma Summit on Wednesday, and Jefferies has its Gene Technology Investor Summit on Thursday, all in New York.
Otherwise, most companies are in a quiet period ahead of their earnings reports, so analysts and investors are instead focused on what impact the brutal hurricane season may have on quarterly results. A few companies have already made comments attempting to quantify the impact, but it appears that most will wait until they report to comment. For medtech companies that rely on procedure volumes, the Street largely expects that any volume shortfalls due to hurricane-related disruptions in September will be made up either in the December quarter or in early 2018. For providers in the hurricane-ravaged areas, it appears that most have avoided incurring significant damage to physical structures, and most, if not all, should be back to normal capacity by now.
The biggest potential impact will come from companies with manufacturing operations in Puerto Rico, which remains mostly without power, cell service, or potable water, with no clear indication of when, if ever, things will be back to normal. Therefore, while the Street will continue to be focused on management commentary related to healthcare reform (particularly for managed care companies), the main emphasis this quarter will be on hurricane-related impacts.
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!


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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