Harvey Impact on HC Companies Likely Not Extensive;
Plus: GILD Acquires KITE; CEO Changes at THC, GMED

With Congress still in recess and the President still reeling from the fallout of his post-Charlottesville comments, an otherwise slow news week was rocked by the devastation caused to the Gulf Coast of Texas and Louisiana by Hurricane Harvey. The healthcare world, therefore, turned its attention to the rescue and recovery efforts, as well as to the longer-term economic impact from the storm. In general, it seems that the direct effect on providers and product manufacturers should be far less severe than on the energy and retail industries, not to mention the untold number of homes that have been destroyed and will need to be rebuilt. But, given that Houston is the fifth largest metropolitan area in the country by population, the potential on the local healthcare system could be material.
 
For example, healthcare providers are likely to see significant service disruptions from the facilities they manage in the area. HCA operates 15 hospitals in the Houston area and another four in Corpus Christi and has more than 10% of its total beds in geographies affected by the storm. Beyond HCA, several other public hospital chains have a disproportionate percentage of their beds in the path of the storm. Now, hospitals, particularly those in regions of the country that are accustomed to major storms, know how to prepare in advance, so the main questions will revolve around whether there has been physical damage to the facilities themselves and the extent to which extreme flooding will prevent staff and patients from accessing them.
 
There is also the ripple effect of volume disruptions on device manufacturers, as prolonged service outages could impact procedure volumes and, therefore, hospital purchasing needs. In some cases, while facilities are open, they are operating with limited supplies and providing reduced services, with many surgeons having rescheduled elective surgeries. The unanswered questions at this stage are for how long will these procedures be delayed and what will hospital spending priorities be once they are able to resume normal operations (i.e., will capital dollars have to go to infrastructure repairs?).  
 
While it may be too soon to quantify the impact, we expect healthcare companies to begin discussing these disruptions at upcoming healthcare conferences, of which there are many in September (see the calendar below). We also expect the Harvey impact to dominate questions once the next earnings season rolls around, given that this storm hit with a little over a month to go in the quarter. For many companies, the impact may not be much more than 1 or 2%, which would not concern the Street. But this will be an emerging story over the next few weeks and the rescue process evolves into a recovery and rebuilding one.

M&A News: GILD Acquires KITE, UNH Acquires ABCO's HC Business

This week also featured two significant M&A transactions. Gilead Sciences (GILD) on Monday announced that it is acquiring Kite Pharma (KITE) for $11.9 billion, representing a ~29% premium to KITE’s closing price last Friday and the first major biopharma deal since JNJ’s acquisition of Actelion earlier this year. For GILD, which has seen sales of its flagship HIV and Hep C drugs decline over the last year, this deal brings in KITE’s cancer immunotherapy portfolio. KITE’s CAR-T treatments use a patient’s own T-cells to fight cancer cells, and the first therapy will be axi-cel for blood cancers (in particular, non-Hodgkin lymphoma), slated for FDA approval in 4Q17/1Q18.
 
GILD management noted that it wants to become the leader in cellular therapy and that KITE’s CAR-T therapies fit well with GILD’s existing portfolio given the company’s experience with complex global supply chains. GILD also sees long-term opportunities in solid tumors despite KITE’s therapies best served to treat hematological cancers. Investors did raise some questions about the deal, namely the need for a more comprehensive logistical infrastructure to manage patient care and the extent to which this opportunity is still early stage. However, the general reaction to the deal has been positive (as measured by GILD’s stock performance), but the longer-term verdict will depend on the revenue ramp.
 
UnitedHealth Group (UNH) on Tuesday announced that it is acquiring The Advisory Board’s (ABCO) healthcare advisory business after ABCO decided to split itself into two units (health and education) and sell each unit separately. UNH is paying $1.3 billion for ABCO’s health business and will use $500 million ABCO debt but also receive ABCO’s 5.9 million shares of Evolent Health (EVH). The education business is reportedly being sold to private equity firm Vista Equity Partners. Analysts generally view this deal positively for UNH has it expands Optum’s capabilities in data analytics and population health, and it also brings in additional hospital and other provider customers. ABCO CEO Robert Musslewhite will join UNH and continue to run ABCO’s healthcare advisory business.

Management Changes: CEO Changes at THC, GMED; CFO Departure at ABMD

There were also several management changes in healthcare this week, starting most notably with Thursday’s announcement that Tenet Healthcare (THC) Chairman and CEO Trevor Fetter plans to step down from both his CEO and director positions by either March 15, 2018 or when a successor is appointed, whichever comes first. Lead independent director Ronald Rittenmeyer assumes the role of executive chairman immediately, and the company has engaged a consulting firm to commence a CEO search as well as to refresh the composition of its board. THC also adopted a shareholder rights plan (effectively, a poison pill), which prevents any current 5% shareholders from purchasing materially higher stakes, thus limiting the advances of potential activist investors.
 
This news comes roughly a week after THC’s largest shareholder, Glenview Capital, relinquished its two board seats and stated it plans to “evaluate other avenues to be a constructive owner of Tenet.” The stock reacted very positively to that news last week, possibly on hopes of interest from a new activist investor (now largely moot given the new poison pill), although part of the rally could also be attributed to the stock’s high short interest (thus precipitating a short squeeze). One possibility for the company is to divest one or more of its business units, notably its USPI ambulatory surgery center business, or it could continue to sell off low-margin hospitals, as it has already been doing this year. It will therefore be interesting to monitor the CEO search process and the extent to which current (or possibly future) investors have a say.
 
Globus Medical (GMED) on Tuesday appointed David Demski as CEO, replacing company founder David Paul, who will remain in his role as Executive Chairman. Demski has been with the company since 2003, first as CFO and more recently as President, Emerging Technologies. Paul is stepping aside as he recovers from a health condition but plans to remain actively involved in the day-to-day activities of the company. The company also reiterated all 2017 guidance targets, noting that this transition should have no impact on operations or financials. The Street is positive on this move, as Demski has been overseeing many of the company’s new initiatives, namely in robotics and trauma.
 
Finally, Abiomed (ABMD) on Monday announced that CFO Mike Tomsicek resigned to pursue other opportunities and that former CFO, Bob Bowen, is returning from retirement to assume the role on an interim basis. The company did reiterate all 2017 financial guidance and emphasized that Tomsicek’s departure did not stem from any accounting or financial disagreements. While a CFO departure is usually cause for alarm, the Street seems reasonably comfortable that there are not broader concerns here and that the story remains on track.

Earnings Review: CTLT Posts Strong 4Q; MDT, COO Mixed

As we previewed in our last edition, there were several key earnings reports that took place over the last two weeks. The entire medtech world was closely attuned to Medtronic’s (MDT) fiscal 1Q18 results and the implications for other companies in the areas in which MDT operates. Total revenue came in below consensus on relative softness in all segment while EPS beat expectations (although largely on a one-time tax benefit). Part of the top-line softness stemmed from the IT issue the company disclosed in July and from the supply constraints impacting the MiniMed continuous glucose monitor sensors.
 
While there is long-term optimism on the Street given several new product launches, there are near-term concerns in light of recent execution missteps and increasing competition in key areas (namely diabetes, TAVR, CRM, and spine). Ultimately, these concerns can turn into easier year-over-year comparisons as we get further into fiscal 2018 and fiscal 2019, but a number of analysts are choosing to wait on the sidelines until there is greater visibility into how the company can generate upside to guidance.
 
Catalent (CTLT) on Monday reported strong fiscal 4Q17 results, as revenue, adjusted EBITDA, and EPS all came in well ahead of analyst estimates. Management also set fiscal 2018 revenue and adjusted EBITDA guidance ranges above consensus, leading to a strong stock reaction during the subsequent trading days. Key drivers in the quarter were strong performances from Drug Delivery Solutions and Clinical Supply Services as the company continues to realize positive returns from recent acquisitions. Margins remains somewhat of an issue as product mix caused 2017 operating margin to be roughly flat with 2016 (which was negatively impacted by a manufacturing facility shutdown). However, management expects to improve longer-term operating leverage via better product mix and synergies from acquisitions. The Street will continue to look at CTLT from an M&A perspective – both as a tuck-in acquirer or, particularly in light of the Thermo Fisher-Patheon deal that just closed, as a possible target (the latter scenario contributing in part to the strong stock performance in recent weeks).

Finally, Cooper Companies (COO) on Thursday posted its fiscal 3Q17 results, with revenue and EPS both ahead of consensus and 4Q EPS guidance slightly ahead of the Street. On the revenue side, upside from CooperVision offset slight softness in CooperSurgical. Contributing to the strength in Vision was the company’s continued salesforce ramp up, which should continue for the next few quarters. The quarter’s puts and takes, combined with the stock’s high valuation, resulted in a slight pullback after hours, as the Street figures out where this company goes from here.

Vacation's Over: Busy Conference Schedule to Dominate September

Looking ahead, the Wall Street healthcare calendar restarts in earnest following the quiet end to August. September is historically a busy month for investor conferences and trade shows as the Street prepares for the gauntlet that is the final four months of the year. After participating in a number of analyst non-deal roadshows and other marketing events during August, company management teams will have many more opportunities to speak publicly before quiet periods commence in October leading up to the September quarter earnings season, which kicks off in mid-October.
 
Despite it being shortened by Monday’s Labor Day holiday, next week is highlighted by several investor conferences, both in the US and internationally. Stateside, RW Baird and Wells Fargo are hosting their annual two-day healthcare conferences in New York and Boston, respectively, on Wednesday and Thursday, while Citi is holding its 12^th annual biotech conference in Boston on those same days. BioCentury on Friday is hosting its NewsMakers in the Biotech Industry conference in New York.
 
Goldman Sachs hosts its European Medtech and Healthcare Services Conference in London on Wednesday and Thursday and then a Biotech Symposium in London on Friday. Finally, Jefferies is conducting a tour of Asian healthcare companies, bringing investors through Singapore, Beijing, and Shanghai on Tuesday through Friday.
 
There is one significant trade show on the calendar next week: the Scioliosis Research Society holds its Annual Meeting in Philadelphia beginning on Wednesday. Please see the calendar below for a comprehensive look at key events in healthcare through the end of September. As always, we welcome all feedback, and have a great holiday weekend!

Best,
Jeremy