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CMS Gets Permanent Chief; Appointment Method Miffs Lawmakers

In early July, during Congress’Independence Day recess, the White House announced that President Obama would use his recess appointment prerogative to make Donald Berwick, M.D., administrator of the Centers for Medicare and Medicaid Services (CMS). The move quickly enraged Republicans who had opposed his nomination. Some Democrats were miffed by the president’s methods. The White House nominated Berwick in April.

“Many Republicans in Congress have made it clear in recent weeks that they were going to stall the nomination as long as they could, solely to score political points,” the Obama administration’s communications director Dan Pfeiffer wrote on the White House blog. “With the agency facing new responsibilities to protect seniors’ care under the Affordable Care Act, there’s no time to waste with Washington game-playing. That’s why tomorrow the president will use a recess appointment to put Dr. Berwick at the agency’s helm and provide strong leadership for the Medicare program without delay.”

The U.S. Constitution requires that the most senior federal officers be confirmed by the Senate before taking office. However while Congress is in recess, the president can act alone by making a recess appointment. To remain in effect, such an appointment must be approved by the Senate by the end of the next session of Congress, or the position becomes vacant again. That means, in current practice, that a recess appointment must be approved by the end of the next calendar year—which in this case, is late 2011. After that, Berwick would have to be re-nominated to continue in his job and likely would face even greater opposition in the Senate if the GOP makes the gains it expects in the upcoming midterm elections this fall.

The move fanned flames of an already heated battle over Berwick’s nomination, with advocates and opponents vying to frame the new CMS leader as an innovative healthcare leader or, alternatively, a dangerous advocate of healthcare rationing.

A pediatrician with three Harvard degrees, Berwick is known in the health policy world for founding the Institute for Healthcare Improvement, an influential think tank in Cambridge, Mass., in 1991. He has been a leading advocate for the idea that the quality of healthcare can improve while errors are reduced and costs decreased.

Medical societies, including the American Medical Association and numerous health reform advocates, lauded Berwick as a qualified and innovative leader.

CMS has not had a permanent head for four years. The Democratic-controlled Senate never took up the nomination of Kerry Weems, former President George W. Bush’s choice in 2007 to head the agency, and the CMS has cycled through a series of acting administrators who do not need Senate confirmation.
Response from Republicans was swift.

Republicans on the Ways and Means Committee in the House of Representatives asked Chairman Sander M. Levin (D-Mich.) to schedule a hearing for Berwick so they could grill him on his views and plans for implementing the health care overhaul law.

The Ways and Means Republicans said their concerns with Berwick were heightened because some Medicare spending faces cuts under the overhaul law.

They echoed concerns expressed by Senate Republicans that Berwick supports rationing of health care services. At issue is his support for comparative effectiveness research, which is aimed at determining which treatments—procedures, pharmaceuticals or devices—are most effective when compared with others.

This was the fourth request by Republicans on the committee for a hearing on the health care law since it was enacted in March, but, so far, Levin hasn’t acted.

“Members of Congress and the American people were denied the opportunity to hear Dr. Berwick’s testimony and learn how he intends to ensure seniors’ access to care is preserved,” the 15 committee Republicans said in a letter to Levin.

Levin countered by saying Berwick’s expertise is “especially needed to ensure that health reform is implemented in a timely and effective way.”

The tone from Republicans on the Senate’s Finance Committee—which oversees healthcare policy—was the same. They wrote: “If (Berwick) is not provided the opportunity to present his qualifications for the position in the usual process, it casts a shadow over his legitimacy and authority to serve as administrator during a critical time for CMS.”

The surprise was from Finance Committee Chairman Max Baucus (D-Mont.).

Baucus said that he “fully expects” the new Medicare chief to testify before thepanel “in the near future.” In addition, he called the recess appointment maneuver an evasion of the Senate confirmation process.

“I’m troubled that, rather than going through the standard nomination process, Dr. Berwick was recess-appointed,” Baucus said in a statement. “Senate confirmation of presidential appointees is an essential process, prescribed by the Constitution, that serves as a check on executive power and protects Montanans and all Americans by ensuring that crucial questions are asked of the nominee—and answered.”

Baucus’ criticism is notable, since he was a leading architect of the sweeping health care reform package championed by Obama. Baucus added that his criticism wasn’t with Berwick, simply with the manner in which he was appointed—a clear slap at the Obama administration. The president said he had little choice in making the appointment.

“It’s unfortunate that at a time when our nation is facing enormous challenges, many in Congress have decided to delay critical nominations for political purposes,” Obama said, noting that more than 180 other nominees are waiting for confirmation by the Senate.
Covidien Buying Spree:

ev3 and Somanetics

The management at Covidien plc certainly is true to its word. In discussing reasons for the company’s recent $2.6 billion acquisition of ev3 Inc., Chairman and CEO Richard Meelia said, “when the right strategic deal comes along we don’t preclude them.”

There have been few, if any, deals Meelia and his colleagues haven’t precluded lately as they reshape and expand the company’s medical device business. During the last 14 months, Dublin, Ireland-based Covidien (U.S. headquarters are in Mansfield, Mass.) has acquired five companies and divested four others as it continues to craft a long-term growth plan and restructure the business that spun off from Tyco International in mid-2007. Within the last three years, Covidien has acquired nearly a dozen companies.

Covidien’s most recent find was Somanetics Corporation, a Troy, Mich.-based firm that sells the INVOS System, a device that measures blood oxygen levels in the brain of patients undergoing surgery to help detect and correct various life-threatening complications. The price tag was $250 million for the publicly traded firm in a deal that represents a 32 percent premium to the closing price prior to the acquisition and a valuation of nearly six times on a trailing price-to-sales basis.

“The acquisition of Somanetics will allow Covidien to broaden our product offerings and add another monitoring technology to our portfolio,” Pete Wehrly, president of Respiratory & Monitoring Solutions at Covidien, said in a news release. “The Somanetics product line, which we currently distribute in Europe, will expand our presence in the operating room.”

Analysts said the purchase is a “logical fit” for Covidien as it attempts to diversify its selection of oximetry and monitoring products. Stephen Simpson, a financial investor and consultant and former equity analyst, believes Somanetics’ core products and technologies are a logical fit for Covidien’s
Nellcor patient monitoring business.

“This deal should enable Covidien to package together more appealing total solutions (and harness technology into new applications) to compete with Masimo and Philips in the patient monitoring market,” he wrote in a story posted on investopedia.com. Plus, Simpson added, Covidien distributes Somanetics’ products in Europe and has been a “significant” part of its rising sales.

In fiscal 2009, Somanetics reported $50 million in sales, a 5 percent increase compared with the $47.5 million the company reported in fiscal 2008. The firm’s latest earnings report shows the increases continuing in fiscal 2010—Somanetics reported $13.9 million in net revenue during the second quarter (ended May 31), a 17 percent increase compared with the $11.8 million it generated during the same period last year. U.S. net revenue jumped 15 percent to $10.7 million, while international revenue rose 28 percent to $3.2 million.

Besides broadening Covidien’s patient monitoring product offering, the INVOS technology from Somanetics pairs nicely with the Bispectral Index, the only system capable of measuring the effects of anesthesia and sedatives on the brain, analysts noted. Covidien added the Bispectral system to its oximetry and monitoring group last year with the $210 million acquisition of Aspect Medical Systems Inc. of Norwood, Mass. Analysts expect the combined revenues from Aspect and Somanetics to add $150 million in annual revenue to Covidien’s Oximetry and Monitoring group, which reported $636 million in revenue in each of the last two fiscal years.

Covidien’s billion-dollar deal with ev3 will further expand its presence in the high-margin, fast-growing vascular device market—a sector the company has been aggressively pursuing. Though they touted the “growth benefits” of the merger during a conference call with analysts, executives admitted that significant growth is not expected to occur before 2012.

Charles J. Dockendorff, Covidien’s executive vice president and chief financial officer, said the acquisition most likely will reduce non-GAAP earnings in fiscal 2010 by 5 cents to 8 cents per share and in fiscal 2011 by about 10 cents to 15 cents.

Such short-term losses, however, pale by comparison to the anticipated growth in the vascular device market. During the conference call, Covidien executives forecast growth of 6 percent to 8 percent within the next five years for the $3.1 billion peripheral vascular market, and 10 percent to 12 percent growth during that time for the $1.3 billion neurovascular market.

“We believe ev3 brings sustainable long-term opportunities in developed regions as well as advanced treatment opportunities in emerging markets such as Brazil, Russia, India and China,” said Joe Woody, president of Covidien’s vascular therapies unit. “Ev3 has the broadest product portfolio in the industry. The opportunity to acquire a strong endovascular lineup in one step was a key reason why we believe ev3 was such a unique opportunity for us.”

And an unexpected one at that. While Covidien steadily has beefed up its vascular business in the past year, the ev3 deal resulted from a competitive bidding process. Meelia called the deal “opportunistic.”

“Some of you may be asking, ‘why now?’“ Meelia said during the conference call. “As we’ve mentioned in the past, acquisitions are opportunistic. When an asset like ev3 becomes available, a company that fits our growth profile and our strategy of vascular expansion, we owe it to our shareholders to investigate the opportunity. When the right strategic deal comes along, we don’t preclude them.”
Covidien executives haven’t precluded the “right” strategic deals for three years now.

Last year, the company created a vascular therapies business unit under the umbrella of its medical devices business in an effort to become a market leader in the endovascular device sector. The creation of that unit coincided with the $440 million acquisition of San Jose, Calif.-based VNUS Medical Technologies Inc. in May 2009. VNUS Medical develops devices for the minimally invasive treatment of venous reflux disease. That acquisition followed the purchase (in March 2009) of Bacchus Vascular Inc., a privately held and venture-backed company selling a system to treat deep vein thrombosis.

Leerink Swann analyst Rick Wise said Covidien’s latest purchase would“dramatically broaden and deepen” its vascular franchise because ev3 develops products in two sectors in which the Ireland-based firm does not participate—peripheral vascular and neurovascular. While vascular devices that combat heart disease receive more attention, peripheral artery disease (PAD) is much more prevalent, William Blair &Co. analyst Ben Andrew said. “Coronary is ultra-saturated,” he told Reuters. “You have the big boys dominating. PAD is less crowded with players.”

To help the company focus on building its vascular business, Covidien executives sold the company’s sleep therapy product line for an undisclosed amount to PHInvest, a privately held company in Luxembourg. The sale is not expected to impact operating income or earnings per share in fiscal 2010 or 2011.

J&J’s Ethicon Divests Its Breast Care Business

Who said venture capital funds in the device sector are dead? Devicor Medical Products, Inc., owned by private equity firm GTCR, purchased Ethicon Endo-Surgery’s Breast Care business. Ethicon is a division of global device giant Johnson & Johnson. Financial details of the deal were not disclosed.

The business sells products designed to help doctors diagnose breast cancer at early stages while minimizing patient discomfort. Going forward, the former J&J property will be called Mammotome, a division of Devicor Medical Products, Inc.

Ethicon’s breast care product portfolio is sold in 50 countries around the world and includes the Mammotome Breast Biopsy System and tissue markers (MammoMARK, MicroMARK, and CorMARK) used for breast disease diagnostic sampling and management. As part of the agreement, Devicor also acquired marketing and distribution rights for Neoprobe Gamma
Detection Systems.

Mammotome’s corporate headquarters will be located in Sharonville, Ohio, where it has leased 30,000 square feet of office space in the Summit Woods Office Park. Recently, the company was awarded a 60 percent job creation tax credit for seven years, valued at $1.5 million, from the Ohio Department of Development. Approximately 300 former Ethicon employees supporting the business will transfer to Devicor

The new owners’ growth plans also include adding more than 150 jobs worldwide, of which approximately 70 positions will be located at the corporate headquarters. In addition, Mammotome plans to build a new manufacturing plant in the next 12-18 months.

“The acquisition of the Breast Care business is a key component in achieving our objective of building a leading medical device business,” said Dean Mihas, principal
of GTCR.

Devicor is a newly formed company focusing on minimally invasive medical procedures, with an initial focus on the vacuum assisted breast biopsy market. Founded in 1980, Chicago, Ill.-based GTCR is a private equity firm focused on investing in growth companies in the financial services, healthcare and information services industries. In the past 30 years, GTCR has invested more than $8 billion in more than 200 companies.

Biomet Plans to Expand at Home, Adding Jobs Too

Biomet Inc. plans to invest $26 million in an expansion that will create about 280 new jobs at its headquarters in Warsaw, Ind.

During a recent Kosciusko County (of which Warsaw is the county seat) council meeting, a representative from Biomet requested economic development area status for parts of the company’s campus that will undergo expansion, according to local news outlets. The economic development status is one of the first steps to securing tax abatement for the project. The council approved the new designation, however, Biomet management will have to ask the council formally for the abatement at a
follow-up meeting.

The plan is to renovate existing property and add new equipment, according to the company. New jobs will be added over the course of two years.

The small borough of Warsaw, which only has a population of about 13,000, is home to three of the world’s largest orthopedic manufacturers—Zimmer Inc., DePuy Orthopedics Inc. and Biomet.