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Whalebone Advisory provides investor relations and strategic advisory services to publicy-traded, pre-IPO, and development stage healthcare companies.
September 8, 2017

Bipartisan Reform Gains Steam With Repeal Off the Table;
Plus: NVS CEO to Retire, TFX Acquires NeoTract

Returning this week from its August recess, Congress faces a number of hurdles and deadlines in revisiting its legislative agenda in what is shaping up to be a much busier September than previously thought. The first hurdle, which has been long suspected but only confirmed last week, is that September 30 is indeed the deadline to repeal the Affordable Care Act (ACA) through the budget reconciliation process (and thus requiring only 51 votes in the Senate). Beyond September, any repeal/replace effort would be subject to the filibuster and would therefore require bipartisan support, a seemingly insurmountable task given that Republican leadership has not been able to secure enough Republican votes for its previous partisan bills.
While GOP lawmakers could theoretically try to jam through a repeal bill this month, there are several other urgent matters that require more immediate attention. The first priority was to pass an appropriation to provide funds for Hurricane Harvey relief, which Congress accomplished on a bipartisan basis earlier this week. Next will likely be relief funding for Hurricane Irma, which is scheduled to make landfall in Florida this weekend (although, as of this writing, the specific path is still not entirely known). Congress must also reach agreement on a new spending bill in order to prevent a government shutdown, raise the debt ceiling (although the President is now suggesting a bipartisan effort to eliminate the debt ceiling altogether), and reauthorize the Children’s Health Insurance Program (CHIP).
Therefore, with the Jewish holidays truncating the September legislative calendar, there is just no time for Congress to take up healthcare in any sort of meaningful way if the goal is to ram through a partisan repeal bill. But, as the events of the spring and summer demonstrated, there is no evidence to suggest that the GOP could reach agreement on a replacement bill anyway. Plus, as we have discussed in the past, even the staunchest ACA opponents understand the political risk of repeal without having a suitable replacement (and thus facing voters next year having to explain why they no longer have insurance).
These factors open the door wider for the burgeoning bipartisan effort to repair the ACA, particularly the rapidly increasing premiums that are threatening to cause the program to collapse. The Trump Administration has certainly helped the process, as the President himself stated a preference to let the ACA collapse on its own before attempting a new reform effort. To this end, the Administration has threatened to cut off cost-sharing subsidies that encourage insurers to participate in the exchanges, and last week HHS announced it will cut the ACA advertising budget by 90% for the 2018 enrollment period.
As a result, we expect there will be greater attention paid to the new process being spearheaded by Senators Lamar Alexander (R-TN) and Patty Murray (D-WA), who will hold hearings this month to explore ways to strengthen the individual exchanges. Republican Senators Bill Cassidy (LA) and Lindsey Graham (SC) are introducing a new replacement bill on Monday on which the Senate could conceivably vote prior to the end of the month, but the details have yet to be unveiled, and it is unclear whether there are 50 votes in support.  In light of the growing rift between Congressional Republicans and the President, stemming in part from the horrified response to Trump’s post-Charlottesville comments and actions, an increasing number of GOP lawmakers are supporting the Alexander-Murray effort. Of course, a good part of their motivation is not to be blamed for the collapse of the ACA (and thus millions potentially losing insurance coverage), but there does also appear to be an increased willingness to defy this President.
Insurers must decide by the end of the September whether they plan to participate in the exchanges next year and what rates they will charge if they do participate. While a stabilization bill does not necessarily have to be in place by then, insurers will at least need assurances that there will be premium support in the form of subsidies. Therefore, Congress will at least have to demonstrate some progress toward a bipartisan bill in order for enough insurers to feel comfortable committing to the exchanges for another year. This is indeed a tall task, but with enough members of Congress rowing in the same direction, it is possible that we see something emerge this fall.

Management Changes: New CEOs at NVS, SGRY

Novartis (NVS) on Monday announced that CEO Joe Jimenez will retire on February 1, 2018, to be replaced by Vasant Narasimhan, who presently serves as NVS’s Chief Medical Officer and Global Head of Drug Development and has been with the company since 2005. The timing of this news came largely as a surprise to the Street, but the reaction was mostly positive, as investors are optimistic about Narasimhan’s ability to manage the company’s product pipeline. They also tend to like his deep medical and commercial experience, as well as his long tenure with NVS, which they hope can help transform NVS into more of a pure-play pharma innovator.
On Thursday, Surgery Partners (SGRY) announced that CEO Mike Doyle, who has been with the company for 13 years, is stepping down from his role and will be replaced on an interim basis by Cliff Adlerz. SGRY has engaged a search firm to find a permanent CEO. Adlerz previously served as President of Symbion Healthcare, which was acquired by SGRY in 2014 and has more than 20 years of operational experience. Adlerz will join SGRY’s board, and Doyle will also retain his board seat.
The initial Street reaction was negative, as the stock traded down more than 5% on Thursday, but the overall sentiment is that new leadership may be necessary to turn the story around and reignite investor interest. The longer-term volume opportunity is there for SGRY as providers continue to move an increasing number of procedures out of the hospital and into the outpatient setting, particularly in orthopedics (where SGRY can leverage its recent National Surgical Healthcare acquisition). Recent quarterly results have disappointed the Street, and analysts believe that Bain Capital, SGRY’s majority shareholder, views this as the right time for a change at the top.

In Other News: TFX Boost Urology Business with NeoTract; NUVA Adds PEEK Products with Vertera; DXCM Collaborating with Fitbit

Teleflex (TFX) on Wednesday announced that it is acquiring privately-owned NeoTract for $1.1 billion ($725 million in upfront cash and up to $375 million in earn-outs based on certain commercial milestones through 2020). NeoTract develops and manufactures urological devices, including the UroLift System for the treatment of benign prostatic hyperplasia (BPH). UroLift is a minimally invasive device implanted during a transurethral outpatient procedure and is designed to minimize obstructions in the prostate. TFX estimates a $30 billion global market opportunity, with most patients treated via drug therapy that brings mixed levels of success.
NeoTract is on track to generate total 2017 revenue of $115-$120 million and to grow sales by 40% in 2018. TFX expects the deal to be slightly dilutive to 2017 EPS, breakeven in 2018, and increasingly accretive beginning in 2019 (an estimated $0.35-$0.40 in 2019). The Street viewed the deal positively, as it fortifies TFX’s urology business and provides another source of revenue upside relative to current estimates. Some analysts also view the initial dilution/accretion estimates as conservative, as TFX may be able to realize some positive synergies and accretion in 2018.
NuVasive (NUVA) on Thursday announced a small acquisition, buying privately-owned Vertera Spine for an undisclosed amount. Vertera manufactures and sells interbody spinal fusion implants using porous PEEK technology and has two products – COHERE (already on the market) and COALESCE for lumbar (approved in June) – that NUVA can integrate into its portfolio. While 3D-printed titanium (used in most implants) has benefits, analysts view PEEK as a favorable alternative given its similarity to bone and lack of complication on imaging modalities like X-ray or MRI (given that it is not metal).
Finally, DexCom (DXCM) on Thursday announced a deal with Fitbit (FIT) to collaborate on continuous glucose monitor (CGM) products to enable people to manage their diabetes and overall health more easily and effectively. The first product would bring DXCM’s CGM data to FIT’s new Ionic smartwatch, with additional products envision for future years. We have discussed on several occasions the extent to which technology companies are exploring how to get involved in healthcare or integrate healthcare applications into their products or technologies, most notably Apple’s (AAPL) quest to make the iPhone a central healthcare data repository. This DXCM/FIT collaboration will be interesting to monitor, and we will look for what similar options other diabetes players will explore.

The Week Ahead: More Conferences and Investor Days

Looking ahead, the September conference gauntlet rolls on with three more events this week, highlighted by Morgan Stanley’s Annual Healthcare Conference in New York from Monday through Wednesday. Rodman & Renshaw hosts its 19th Annual Global Investment Conference beginning on Sunday in New York, while Bank of America Merrill Lynch is holding its Global Healthcare Conference in London from Wednesday through Friday.
In addition to investor conferences, two companies are hosting investor events. Glaukos (GKOS) is hosting its first ever Investor Day as a public company on Thursday in New York, while Dentsply Sirona World 2017 (XRAY) takes place in Las Vegas on Thursday through Saturday.
Please see the calendar below for a comprehensive look at key events in healthcare through the end of October, including a preliminary look at the September 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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