Healthcare / Life Sciencescontent.rwbaird.com/Conferences/HCC16KeyTakeaways.pdf · with about...

This report highlights key takeaways and best ideas following Baird's Healthcare

Conference in New York September 7 & 8. 103 companies (94 public, nine private)

attended the event, up from 88 last year. Baird hosted fireside chats, presentations, and

investor dinners with company management teams. This research note summarizes key

themes, takeaways, and stock implications from the nine Baird research teams that hosted

companies at the conference.

■ Healthcare Supply Chain & Pharma Services. CROs reported generally stable and

healthy market demand. The group continues to drive operating margin improvement

though yards unsurprisingly appear harder ahead. Despite drug pricing recently making

headlines again, our sense from supply chain participants was that there hasn’t been any

significant change to recent brand and generic inflation trends.

■ Healthcare IT. Commentary around near-term growth expectations was somewhat

mixed, in our view, with vendors focused on payment accuracy (HMSY, COTV),

communication solutions (VCRA), and telehealth (TDOC), expressing the most optimism.

However, select EHR-focused vendors continue to face market and company-specific

challenges over the near term.

■ Medical Technology. Utilization/patient volumes generally held in well this summer

(dental feedback more mixed), while FDA continues to more constructively work with

companies to facilitate easier/faster/less costly device approvals. We leave our meetings

incrementally positive on COO, VAR, PODD, DXCM.

■ Human Capital Technology & Services. Demand for temporary clinicians remains at

record levels providing AHS with a robust pipeline and the opportunity to expand margin

further through an improved mix. Separately, HQY continues to grow very rapidly, gaining

share through its superior solution in a robustly growing market for HSA administration.

■ Facilities & Services. Takeaways: (1) utilization/volume trends for 2016 have slowed,

but are likely tracking better than fears; (2) Medicaid expansion presents upside in 2017;

(3) Labor challenges seem exaggerated with providers citing some pressures, but within

expectations; (4) ACA exchange risk is limited.

■ Life Science Tools & Diagnostics. Scientific discoveries and technological advances

are enabling a new era in diagnostics, driven by personalized medicine, rising healthcare

costs, and an aging population. Tools companies continue to see growth opportunities,

especially in biopharma and China.

■ Biotechnology. Post conference, we expect the last quarter of 2016 to see an

acceleration in tradeable events. Despite a rough 1H16 for biotech, talk around

financing/capital allocation have picked up as incremental catalysts come to the forefront.

As the group starts to trade independently, we think it’s a stock pickers’ market.

Research Baird

[email protected]

Eric W. Coldwell, Sr. Research Analyst

[email protected]

312.609.5467

Matthew Gillmor, Sr. Research Analyst

[email protected]

615.341.7113

Jeff D. Johnson, Sr. Research Analyst

[email protected]

414.298.6027

Mark S. Marcon, Sr. Research Analyst

[email protected]

414.298.7556

Whit Mayo, Sr. Research Analyst

[email protected]

615.341.7110

William V. Power, Sr. Research Analyst

[email protected]

214.220.3055

Catherine W. Ramsey, Sr. Research Analyst

[email protected]

312.609.5460

Brian P. Skorney, Sr. Research Analyst

[email protected]

646.557.3204

Michael E. Ulz, Sr. Research Analyst

[email protected]

404.264.2236

September 9, 2016 Baird Equity ResearchHealthcare / Life Sciences

Healthcare / Life SciencesKey Takeaways and Best Ideas from Baird's 2016 Healthcare Conference

Robert W. Baird & Co.

[Please refer to Appendix- Important Disclosuresand Analyst Certification]

September 9, 2016 | Healthcare / Life Sciences

Baird Healthcare Research Best Ideas In addition to research team-specific commentary on pages 3-10, this report includes 21 best ideas from the nine Baird research teams that hosted companies at the conference. Most, but not all, the companies listed below attended the conference. The complete list of featured stocks with summary investment theses and risks can be found at the end of this research note (pages 11-14). Baird Healthcare Research Best Ideas

Please contact your Baird sales representative and/or the individual Analyst(s) for additional information on these or other covered companies.

Baird Research Best Ideas

Company Market

Name Ticker Sector Analyst Capitalization ($M)

Thermo Fisher Scientific Inc. TMOLife Science Tools and

DiagnosticsRamsey $59,337

McKesson Corporation MCKHealthcare Supply Chain

& Pharma ServicesColdwell $41,746

HCA Holdings, Inc. HCA Facilities & Services Mayo $29,584

Zimmer Biomet Holdings, Inc. ZBH Medical Technology Johnson $25,996

BioMarin Pharmaceutical Inc. BMRN Biotechnology Ulz $16,419

Universal Health Services, Inc. Class B UHS Facilities & Services Mayo $11,900

Cooper Companies, Inc. COO Medical Technology Johnson $9,191

athenahealth, Inc. ATHNHealthcare Information

TechnologyGillmor $4,930

Neurocrine Biosciences, Inc. NBIX Biotechnology Skorney $4,416

Charles River Laboratories

International, Inc.CRL

Healthcare Supply Chain


AmSurg Corp. AMSG Facilities & Services Mayo $3,702

HealthSouth Corporation HLS Facilities & Services Mayo $3,699

PRA Health Sciences, Inc. PRAHHealthcare Supply Chain


Cotiviti Holdings, Inc. COTVHealthcare Information


Ultragenyx Pharmaceutical, Inc. RARE Biotechnology Ulz $2,683

Allscripts Healthcare Solutions, Inc. MDRXHealthcare Information


Diplomat Pharmacy, Inc. DPLOHealthcare Supply Chain


AMN Healthcare Services, Inc. AHSHuman Capital

Technology & SolutionsMarcon $1,740

Axovant Sciences Ltd AXON Biotechnology Skorney $1,597

NanoString Technologies, Inc. NSTGLife Science Tools &

DiagnosticsRamsey $327

Curis, Inc. CRIS Biotechnology Skorney $238

Source: Baird Research and Factset Research Systems

Details

2Robert W. Baird & Co.


Healthcare Supply Chain & Pharma Services

Summary:

CROs reported generally stable and healthy market demand. The group continues to drive operating margin improvement though yards unsurprisingly appear harder ahead. Despite drug pricing recently making headlines again, our sense from supply chain participants was that there hasn’t been any significant change to recent brand and generic inflation trends. Key Highlights:

AmerisourceBergen (ABC). There were no updates on pricing, though our sense is not much has

changed on brand or generics since early August update. Some early progress has been made pricing new customer contracts to align with changing brand/specialty/generic market mix. The WBA relationship is as strong as ever following extension to 2026 and second warrant tranche exercise.

Charles River (CRL). WIL integration continues to progress extremely well; the high end of $17M-

$20M synergy guidance appears very achievable. Safety Assessment utilization remains near optimal 80%-85%, orders are being placed nicely through year-end, and favorable price adjustments continue to stick. CRL is capturing RMS share in Academic market after premium price spread vs. competitors narrowed in recent years.

Diplomat Pharmacy (DPLO). DPLO continues to model low end of historical 8%-10% price inflation

in guidance, excluding Hepatitis C (HCV) and Specialty Infusion which aren’t inflating, and has not seen a change in trend since the 2Q16 August update despite another recent drug pricing controversy. DPLO has tough second-half HCV comparisons and models its HCV revenue (3%-4% gross margin) down in line with the market. SG&A leverage outlook remains positive due to: 1) new product mix but also 2) low distribution network capacity utilization, and 3) various operational efficiency initiatives.

ICON (ICLR). Following a sluggish first half, bookings with largest client Pfizer are perking up,

consistent with prior expectations. ICLR believes strongly that direct site engagement via site management organization (SMO) ownership is an appropriate part of long-term patient recruitment strategy. Subject to antitrust clearance, ICLR still expects the Clinical RM acquisition to close this month (September).

INC Research (INCR). INCR’s 2H new business pipeline is at a record level due in part to choppy

decision making during 1H but also due to generally solid client activity. INCR continues to focus on growth opportunities like functional service (FSP – 2% of INCR’s mix today vs. 20%-30% at some larger peers) but also late phase and medical device. These opportunities typically are lower margin so any significant traction here could influence future margin trajectory.

Medpace (MEDP). The recent IPO was a strategic business decision. The public exposure: 1)

raises the platform’s visibility, 2) provides increased financial transparency to clients, and 3) enhances staff recruitment and retention efforts. With modest 1.7x pro forma debt/EBITDA, the future intermediate-term capital priority is likely facilitating the thoughtful, orderly exit of its lead private equity investor.

Owens & Minor (OMI). The long-term strategy focuses on addressing system-wide complexity

which means expanding beyond acute distribution to non-acute, manufacturer services, and information/data/services; a deeper dive will come at late-2016 investor day. No official decision yet, but seems logical for Novation/MedAssets to combine GPO renewal in late 2017.

Premier (PINC). Company remains generally upbeat on Supply Chain Services based on GPO

compliance trends, inbound inquiries following competitor consolidation, and specialty pharmacy penetration and further scale via the Acro acquisition. The Performance Services backdrop remains complex, but portfolio remains well positioned and customers are gradually moving forward (e.g., recent Verity Health announcement).

Healthcare Supply Chain & Pharma Services Team represented at Healthcare Conference

Eric W. Coldwell Evan A. Stover, CFA Michael K. Polark, CFASenior Analyst Senior Research Associate Research [email protected] [email protected] [email protected] 312.609.5439 312.609.5468



Life Sciences Tools & Diagnostics

Summary:

Scientific discoveries and technological advances are enabling a new era in diagnostics, driven by personalized medicine, rising healthcare costs, and an aging population. Tools companies continue to see growth opportunities, especially in biopharma and China. While academic/government results have been mixed recently, 2H16 could benefit from NIH funding increase and budget cycle timing. Timely CPHD/DHR deal fueled the conversation around M&A, as did recent acquisitions by several presenters. Key Highlights:

Recent acquisitions take center stage. VIVO’s acquisition of lead-testing company Magellan

Diagnostics is exceeding management’s expectations, with Magellan now expected to be slightly accretive in FY16, barring one-time charges. OXFD remains pleased with its acquisition of tick-borne disease testing company Imugen, as it will expand OXFD’s addressable market and allow commercial leverage and risk mitigation through call-point overlap and a second U.S. lab. TECH remains excited about its entry into genomics through its recent Advanced Cell Diagnostics acquisition, and we expect to hear further updates at the analyst day next week. While CPHD didn’t present at the conference due to its pending acquisition by DHR (covered by Baird analyst Rick Eastman), the deal generated increased discussion around the M&A appetite in the diagnostics sector.

CERS’ technology gaining momentum. Since the FDA approvals of Intercept platelets and

plasma in December 2014, Intercept has garnered support from key industry leaders and blood centers, with ~80% of the U.S. platelet market under contract/framework agreements and fifteen customer sites now live. Recent developments include FDA guidance document mandating the use of pathogen reduction or Zika testing for all U.S. blood collections, BARDA agreement for red blood cell development, and American Red Cross implementation. Looking ahead, potential catalysts include updates on the potential South African tender award (up to ~$6M revenue opportunity), French bacterial protection mandate (up to ~$10M-$15M revenue opportunity), and final FDA guidance on bacterial detection in platelets (timing unknown). CERS also plans to file for CE Mark for red blood cells in 2H16 (potential 2H17 approval).

EXAS executing on improved positioning. Colorectal cancer screening is a large, unmet need,

with about ~50,000 deaths and about ~140,000 new cases diagnosed in the U.S. each year, ~60% of which are caught late-stage. The Cologuard launch has gone well so far, yet EXAS still has a long runway, having penetrated only ~1% of the total market (~15% of physician market). Management believes it will significantly surpass its previous internal target of 50,000 ordering physicians by 2016-end. The national TV ad campaign has exceeded management’s expectations, and EXAS plans to develop additional ads to capitalize on its success. Increasing insurance coverage, guideline inclusion (ACS, USPSTF, NCCN), and anticipated quality measures inclusion (HEDIS, Medicare Star ratings) could help drive volume growth going forward.

Macro outlook is generally stable/improving. Companies are continuing to highlight strength in

biopharma and APAC, particularly China. While academic results have been mixed recently, we think companies like TECH and NSTG could benefit in 2H16 from the release of increased NIH funding and natural timing of the academic budget cycle. While companies don’t yet have clarity on what the full impact of Brexit will be, most have not seen significant disruption from customers thus far.

Life Science Tools & Diagnostics Team represented at Healthcare Conference

Catherine W. Ramsey Emily G. StentSenior Analyst Research [email protected] [email protected] 312.609.5492



Healthcare Information Technology

Summary:

Commentary around near-term growth expectations was somewhat mixed, in our view, with vendors focused on payment accuracy (HMSY, COTV), communication solutions (VCRA), and telehealth (TDOC), expressing the most optimism. However, select EHR-focused vendors continue to face market and company-specific challenges over the near-term. Key Highlights:

HMSY key highlights. CFO Jeffery Sherman remains bullish on commercial growth; the 15M new

lives signed during 2Q give HMSY the "first pass" for PI reviews, and we are optimistic this should support the company's 20% growth outlook. Notably, HMSY announced the acquisition of Essette, expanding HMSY's service offering beyond traditional COB/PI, and into the higher growth Care Analytics and Risk Management areas (Essette's membership has grown 25% annually since 2008). Despite the acquisition, HMSY’s balance sheet remains poised for additional M&A.

QSII key highlights. QSII’s CFO reiterated that the company’s transformation efforts remain the

top priority in the foreseeable future. Arnold indicated the customer attrition rate climbed to nearly 10% (from 5%), but has been declining in recent quarters; current guidance assumes attrition remains below 10%. While FY18 guidance has not been set yet, QSII expects bookings to accelerate in late FY17, benefitting revenue in late FY18. Management views the upcoming MACRA legislation as a key positive that will accelerate the move to value-based care (primarily benefits Mirth growth).

MDRX key highlights. VP of IR Seth Frank highlighted multiple growth drivers over the near term,

including the EHR replacement market (driven by sunsets and existing clients aiming to further standardize), population health solutions, and increased services revenue. The OptumCare win highlights MDRX’s ability to compete for replacement opportunities (largest TouchWorks win to-date), with the implementation pace largely dependent on Optum’s strategy. Additionally, MDRX seemed optimistic Client Services gross margin could improve meaningfully over the medium term.

COTV key highlights. COTV remains very bullish on the cross-sell opportunity between the

company’s legacy platforms (iHealth, Connolly) and estimates the combined company has achieved just ~20% of the long-term potential. Additionally, overall penetration within COTV’s customer base remains relatively low. Finally, given recent/pending implementations (six scheduled for 2H), NTM revenue visibility remains very high, in our view. COTV remains one of our preferred HCIT ideas, underpinned by solid organic growth, high margins/FCF, and seemingly reasonable valuation relative to growth.

CPSI key highlights. CEO Boyd Douglas stressed CPSI’s long-tenured expertise in the small

hospital market and paralleled its role as that of a hospital management company. An established clinical solution, strong customer relationships and a lower price point will be key differentiators in the marketplace over the long term. The mix shift from licensed to subscription sales creates quarter-to-quarter fluctuations in revenues/EBITDA, but CPSI continues to expect to grow 10% over the long term and is hopeful MU3 could accelerate trends into 2018.

ABCO key highlights. CEO Robert Musslewhite highlighted the strength and depth of ABCO’s

member relationships, and the numerous challenges facing both the higher-education and healthcare sectors. The higher-ed opportunity remains less mature, and the growth improvement at Royall should be sustainable for the foreseeable future. For healthcare, management indicated it may take several quarters for the recent sales reorganization (now member-focused, vs. previously more product-focused) to positively impact revenue trends. CFO Michael Kirshbaum indicated buybacks and M&A remain near-term priorities, but we think management is less inclined to pursue healthcare acquisitions that require meaningful investment (i.e., EBITDA margin dilutive).

Private and non-covered company presentations: Teladoc (TDOC), Vocera (VCRA), Craneware

(CRW.L), emids Technologies (private). Please contact a member of our research team for additional details.

Healthcare Information Technology Team represented at Healthcare Conference

Matthew Gillmor, CFA Sean P. McBrideSenior Analyst Research [email protected] [email protected] 414.298.5128



Medical Technology

Summary:

While most companies pointed to seasonally slower domestic patient volumes, it sounds as if demand across most core medtech verticals held in well this summer, with dental the primary exception (U.S. feedback mixed, but Europe/rest of world dental stable). FDA feedback is also turning increasingly favorable (“increasingly helpful”, “constructively working to help us get our products approved”, etc.), especially for lower-risk products. On a company-specific basis, we came away feeling best on COO and we’re also incrementally positive on Neutral-rated names including VAR, PODD, and DXCM. Key Highlights:

Utilization stable for core medtech. Other than typical seasonality-related issues, it sounds as if

utilization/patient volumes were largely stable across core medtech end markets this summer in the U.S., with Europe/ROW feedback generally stable to slightly improving. While we don’t get the feeling there will be much in the way of volume-driven upside surprises from our covered companies in 3Q, we similarly don’t expect any major volume-driven negative surprises, a key area of concern we’ve increasingly heard from investors in recent weeks.

The one utilization exception (we think) was with dental. Dental trends for the latter part of the

summer were harder to discern, with most of our dental companies either offering very limited to no commentary on August (HSIC, XRAY) or saying that August was slightly better, but still not back to growing at rates seen last year and earlier in 2016 (PDCO). Even ALGN, who we thought sounded generally upbeat overall (especially regarding OUS trends), reiterated during yesterday’s presentation that N.A. GP trends tend to slow in the summer. Combined with our ongoing channel checks and dental survey feedback, we believe these guarded/limited August comments likely suggest soft overall demand seen in June and July across most parts of the domestic dental market continued into August.

FDA increasingly constructive. In diabetes, we’ve increasingly heard over the last 12-24 months

that FDA is more and more willing to work with companies towards pseudo-AP and other device-related approvals, with PODD reiterating that point in our meetings yesterday and DXCM and TNDM suggesting similar in our meetings on Wednesday. We heard similar commentary from two of the non-covered ophthalmology companies who presented at our conference yesterday as well (Presbia an Revision Optics), with Revision pointing to the June approval of their Raindrop corneal inlay (sooner than expected and without a required panel meeting) as evidence that for lower-risk devices, FDA is looking to help companies more efficiently bring new products to market.

Cash flow trends solid. With end markets largely stable, currency headwinds abating, and pricing

pressures (for core orthopedics) and promotional activity (in contact lenses) stable to "normal," most of our covered companies remain flush with cash, with most pointing to tuck-in/bolt-on acquisitions as their primary preferred use of cash, followed by debt pay-down (where appropriate) or share buybacks.

Incrementally positive on COO, VAR, PODD, DXCM. For COO, we exit our meetings encouraged

by stable to improving end markets, manageable competitive risks, and significant margin expansion opportunities (both gross and operating) as soon as next year. Combined with what we consider to be still-reasonable valuation (just over 19x NTM EPS despite mid-teens+ EPS growth potential next year), these positives keep COO at the top of our recommended list. For Neutral-rated VAR, PODD, and DXCM, we are also incrementally encouraged on fundamentals, although valuation keeps us on the sidelines with these names for now (see PODD and VAR reasons in our medtech-specific Day 2 conference recap note published separately today and our DXCM thoughts in our Day 1 conference recap note yesterday).

Medical Technology Team represented at Healthcare Conference

Jeff D. Johnson, O.D., CFA Jason M. Bednar, CFASenior Analyst Senior Research [email protected] [email protected] 414.298.6057



Human Capital Technology & Solutions

Summary:

The demand for temporary clinicians continues to remain at the strongest levels since the early 2000s, providing AHS with a robust pipeline of new orders and the opportunity to continue to increase margins through an improved mix. On a separate note, HQY continues to grow very rapidly as it continues to gain share through its superior solution in a robustly growing market for HSA administration. Key Highlights:

AHS continues to see a strong demand for temporary clinicians. Given the supply/demand

imbalance, orders continue to grow on a yoy basis and materially outpace what AHS can fill. There seems to be ample runway for growth over the next several years given order levels, supply remains the limiting factor. AHS continues to invest in recruiters and technology to attract supply and increase the fill rate of their order book.

AHS seeing an MSP demand surge in 2016. The prolonged supply/demand imbalance is resulting

in more systems turning to strategic partners for assistance to ensure their needs are met. As the leading provider of MSP agreements, AHS has seen a demand surge for MSPs in 2016 as more systems look to not only ensure their staffing needs are met, but address other needs such as workforce optimization, permanent recruitment and leadership vacancies through AHS’ broad portfolio of workforce solutions.

HQY continues to gain share in the rapidly growing HSA administration market. Adoption of

HSAs remains robust and HQY finds itself growing HSAs and AUM at roughly 2x-3x the already rapid industry growth rate. HQYs superior solution positions it to continue to capture share in this rapidly growing market with the potential for acquisitions to enhance growth further as the market is highly fragmented and continues to consolidate around the largest players.

Connected Technology

Key Highlight:

Fitbit takeaways. The company is positive on the long-term corporate wellness and insurance

opportunity. Fitbit also believes the breadth and price range of its products stack up well against the Apple Watch Series 2.

Human Capital Technology & Solutions Team represented at Healthcare Conference

Mark S. Marcon, CFA Gregory S. MendezSenior Analyst Senior Research [email protected] [email protected] 414.765.3646

Connected Technology Team represented at Healthcare Conference

William V. Power, CFA Charles ErlikhSenior Analyst Research [email protected] [email protected] 414.765.7043



Facilities & Services

Summary:

Provider commentary indicated: (1) utilization/volume trends for 2016 have slowed, but are likely tracking better than buy-side fear (August feels better vs. July); (2) ACA tailwinds have softened (still a backstop), but Medicaid expansion presents an upside risk factor in 2017; (3) labor/wage pressure remains a consistent theme, but we sense somewhat manageable in the context of overall cost controls, and perhaps exaggerated a bit by investors; (4) ACA exchange risk was indicated as limited with hospitals noting there will still be payers offering plans in each market. Key Highlights:

Volumes muted vs. 2014-15 levels, but we sense August bounced vs. weak July. Our

impression is commentary from presenting companies (hospitals, psych, PPMs, ASCs, post-acute) generally suggests that while July was weak, August bounced back. Expectations surrounding core trends/volume growth have moderated from peak ACA levels, but are still expected to be positive going forward (excluding rural acute peers), given the positive economic and employment outlook.

ACA tailwinds have subsided; Medicaid expansion more likely in 2017. Hospitals indicated that

we are now in a period of more normalized growth after experiencing strong growth from the ACA, but further Medicaid expansion could provide upside in 2017 and beyond. Providers also indicated that they still expect some growth during the 2017 Open Enrollment period and believe there will still be plan options in their markets despite recent payer departures. States indicated to have positive momentum around Medicaid expansion include FL, TN, and GA.

Labor challenges cited as consistent “pressure point,” but we sense could be more manageable vs. buy-side fears. While every provider sub-sector cited at least some labor

challenges and wage pressure, most indicated that these dynamics were largely isolated to a select markets. Urban hospitals appear to see more pressure vs. rural for nurse coverage. We sense that usage of premium pay and temporary clinicians has largely stabilized, but remains at a comparatively elevated level. The impact of these labor challenges has largely been limited to cost pressure, except for behavioral providers which have also continued to cite having to turn away volume as a result of clinician shortages.

Exchange patients represent a relatively small risk. Concern surrounding the exiting of insurers

from exchange plans was fairly limited across most providers, with several companies citing fairly low percentages of EBITDA attributable to exchange patients. We also sensed very little apprehension surrounding the availability of exchange plans, premium increases, and long-term survivability of the exchanges. In general, we think providers are still expecting to see incremental exchange enrollment in most of their markets.

Providers generally indifferent to presidential candidates. Providers generally sounded agnostic

when questioned regarding which presidential candidate would be most preferable to their businesses. However, the consensus thought did seem to be that a Clinton victory would be more likely to result in Medicaid expansion in a state such as Florida, but would still be unlikely to lead to expansion in strongly opposed states like Texas.

Other highlights. (1) ACHC expects its geographic mix to be approaching 70% US and 30% UK in

2017, after UK divestitures and redeployment of proceeds into the US. (2) AMED cited concerns with the Medicare pre-claim review demonstration in Illinois, and believes there could be issues expanding the program into other states. (3) MD continued to cite a very robust pipeline of acquisitions having completed over 10 practice acquisitions this year, and indicated they have even a greater number under LOI currently.

UHS dinner meeting. Key takeaways: (1) our sense is acute volumes rebounded in August after a

tough July; (2) behavioral JVs/partnerships have emerged as a real growth opportunity; (3) labor challenges in the psych business are expected to persist, but are still limited to only a select few markets (10%-15%); and (4) we sense buybacks have moved up the priority list after putting $1b to work in deals in the past year.

AMSG dinner meeting. Key takeaways: (1) deal close is still anticipated to be in 4Q16; (2) synergy

and growth assumptions seem reasonable; (3) out-of-network exposure is small and unlikely to be an issue; (4) the Florida Attorney General has closed its inquiry into the merger, after filing a RFI earlier this week; and (5) management believes recent sector volume concerns are likely misplaced.

Facilities & Services Team represented at Healthcare Conference

Whit Mayo Patrick Hart Nathan O. LeiphardtSenior Analyst Research Analyst Research [email protected] [email protected] [email protected] 615.341.7119 615.341.7115



Biotechnology

Summary:

Attending companies highlighted numerous upcoming catalysts, indicating that the back quarter of 2016 should see an acceleration in tradeable events. Despite a rough first half of the year for the biotech sector, talk around financing and capital allocation have picked up as incremental catalysts come to the forefront. As the group starts to trade independently, we think it’s a stock pickers’ market. Key Highlights from Skorney:

Neurocrine Biosciences, Inc. (NBIX) takeaways. Late-stage assets prepping for launch: Post the

recent NDA submission for valbenazine (now Ingrezza), Neurocrine management shared intentions to focus about 75-80% of the sales force on psychiatrists given the association between TD and antipsychotic use, with the remainder of the focus on neurologists treating patients specifically for the movement disorder. Management also provided additional clarity on AbbVie’s expected 2017 filing for elagolix, noting that it will likely occur in 2H17. Tourette data upcoming, additional clarity on what to look for: We continue to look forward to Phase 2 data from Ingrezza in Tourette syndrome, which management now says may occur closer to the beginning of next year. In addition, NBIX indicated that a 50-55% improvement on the Yale Global Tic Severity Score would be a “home run” for both trials, with an expected 10-30% placebo response rate. If all goes well, NBIX plans to initiate a Phase 3 trial next year.

Curis, Inc. (CRIS) takeaways. Immuno-oncology opportunity boosted by additional Aurigene

investment: Immediately prior to the company’s presentation, Curis announced that Aurigene agreed to forego $24.5M in future potential milestone payments in exchange for 10.2M CRIS shares at a 39% premium to share price. To us, this move signals confidence on Aurigene’s part in the company’s oral, small molecule portfolio, which currently includes clinical-stage CA-170, a dual PD-L1/VISTA inhibitor, and two preclinical stage assets: a dual PD-L1/TIM-3 inhibitor and an IRAK4 inhibitor. We believe CA-170 is potentially Curis’ most lucrative opportunity, and we are encouraged by Aurigene’s move here. We continue to expect preliminary CA-170 data by mid-2017.

Axovant Sciences Ltd (AXON) takeaways. 2017 set to be a pivotal year: Management discussed

what to look for in the intepirdine (formerly RVT-101) MINDSET Alzheimer’s Phase 3 data next year, indicating a goal of similar improvements on both ADAS-Cog-11 and ADCS-ADL to what was shown in the ‘866 study. Further, the company highlighted the opportunity in Alzheimer’s in general in light of upcoming data for disease modifying therapies for early stage patients. The AXON opportunity may be overlooked given that even if the disease modifiers are launched, patients will continue to progress, leaving a substantial market for an incremental product for more severe patients. More clarity on recent deal with Qaam Pharmaceuticals: Management highlighted the recent announcement, noting that RVT-103, a combination of donepezil/glycopyrrolate, could ultimately be used to improve upon the tolerability of intepirdine plus donepezil in Alzheimer’s disease and other dementias. RVT-104, a combination of glycopyrrolate and high-dose rivastigmine, could be added to intepirdine to improve efficacy while counteracting potential tolerability issues with glycopyrrolate.

Achillion Pharmaceuticals, Inc. (ACHN) takeaways. Crucial data later this month: We’re looking

forward to a special EASL conference later this month (September 23/24) where J&J will present Phase 2a data for Achillion’s odalasvir plus J&J’s simeprevir and AL-335. Specifically, we will see data from the triple combo at six/eight weeks, with management targeting cure rates in the high 90s. We will also see data from a doublet of odalasvir and AL-335, a nuc, at eight weeks. Post release of the data, J&J is expected to finalize the study design for the previously announced Phase 2b trial. If successful, we think an odalasvir-containing regimen has the potential to be the first, if not only, sub-eight-week cure for Hep C. Factor D opportunity: Achillion is on track to initiate Phase 2 studies with ACH-4471, an oral Factor D inhibitor, in PNH and C3 glomerulopathy. PNH data may be available by YE16. The company is targeting 1.5 times the upper limit of normal LDH, similar to what Soliris has shown, which, if achieved, could make the Factor D opportunity a significant one for Achillion.

Biotechnology Team represented at Healthcare Conference

Brian P. Skorney, CFA Michael E. Ulz Neena M. Bitritto-GargSenior Analyst Senior Analyst Research [email protected] [email protected] [email protected] 404.264.2236 646.557.3205

Colleen M. HanleyResearch [email protected]



Key Highlights from Ulz:

BioMarin Pharmaceutical (BMRN) takeaways. BMN 270 on track: Barry Carter, Head of Vector

Biology, highlighted promising proof-of-concept data from BMN 270 in hemophilia A, though the early nature of the data was emphasized. We expect an update before YE, which should help us understand when increases in factor VIII expression might stabilize as well as the durability of response. Importantly, the company remains on track to initiate a Phase 2b study in mid-2017, which will explore additional doses. Brineura update: Longer-term data at 81 weeks confirmed a durable response, though unfortunately triggered a three month delay in the PDUFA date to April 27, 2017.

Ultragenyx Pharmaceutical (RARE) takeaways. Catalyst timelines reiterated: The company

reviewed multiple upcoming catalysts across the pipeline that remain on track, highlighting continued clinical and regulatory execution. Multiple updates nearing: These include updated Phase 2 data for KRN23 later this month at ASBMR with conditional filing in Europe expected by YE16; Phase 2 data for triheptanoin in FAOD (including medical event rates) and in Glut1 seizure patients are both expected in 2H16; CHMP opinion on Ace-ER is expected in 2H16, with filing for rhGUS expected in 1Q17.

Tesaro Inc. (TSRO) takeaways. Detailed NOVA data next month: The company highlighted recent

NOVA results in 2L+ maintenance of ovarian cancer, confirming robust PFS and utility beyond the gBRCA population. As previously indicated, the full dataset, including additional subgroups (HRD- and tBRCA), will be presented at ESMO in October. Varubi launch progressing: The company reiterated that early launch trends for Varubi are encouraging with meaningfully expansion of the market opportunity expected next year with launch of the IV formulation in the US (PDUFA January 11, 2017) and oral formulation in the EU (1H17).

Amicus Therapeutics (FOLD) takeaways. Galafold launch: Focus remains on the recent launch of

Galafold for Fabry disease in Europe and broader geographic expansion (US and Japan). The company highlighted that 21 patients are on therapy, mainly from Germany, which does not include conversion of any patients from the long-term extension study. FDA meeting 4Q16: The most notable update included a delay in timing of a regulatory update on the path forward in the US for Galafold from 3Q16 to 4Q16. While the delay is unfortunate, we are encouraged that a “Type B” meeting has been scheduled, and we note the delay was related to getting a meeting scheduled with the FDA.

Karyopharm Therapeutics (KPTI) takeaways. STORM data: The company highlighted interim

Phase 2b STORM data in multiple myeloma, announced earlier in the week, demonstrating a clinically meaningful ORR of 20% in the target penta-refractory population, meeting the company’s bar for success. Importantly, this trigged an expansion of the STORM study (120 penta-refractory patients) with data expected in early 2018, which could support accelerated approval. BOSTON study: The company also highlighted that a Phase 3 study of selinexor in combination with Velcade is expected to begin in mid-2017, which should serve as a second confirmatory study for selinexor in MM.

NewLink Genetics (NLNK) takeaways. Indoximod: The IDO pipeline continues to progress with the

company highlighting its Analyst Day next month (October 25th

) which will provide an update on indoximod and next steps for the wholly-owned program. GDC-0919: We continue to believe GDC-0919 has potential, validated by the partnership with Genentech. However, timing of data from the ongoing Phase 1b study remains unknown as Genentech controls communication around the program.

Paratek Pharmaceuticals (PRTK) takeaways. Continued pipeline progress: Phase 3 data from the

oral-only skin study and pneumonia study remain on track for 2Q17 and 3Q17, respectively. We believe pending omadacycline data have been further de-risked based on the robust OASIS results.

Proteon Therapeutics (PRTO) takeaways. Pivotal data in December: The company highlighted the

significant unmet need for drugs that prevent fistula failure, and data from the Phase 3 PATENCY-1 trial of vonapanitase remain on track for December 2016.



Best Ideas / Risk Factors

Healthcare Supply Chain & Pharma Services:

Charles River Laboratories International, Inc. (CRL): The portfolio is increasingly balanced,

scaled, and scientifically differentiated and CRL appears to be sustaining momentum across most, if not all, businesses. Long-term financial targets, including low-double-digit annual adjusted EPS growth, remain attractive and appear achievable. We remain comfortable with CRL’s fundamental trajectory and believe shares can continue to grind higher over the NTM. We think that our $100 target could reasonably be achieved by early 2017, effectively a 20x PE on ~$5-plus EPS. Risks include the biotech funding environment, large client M&A, seasonality, foreign currency, and acquisition integration.

Diplomat Pharmacy, Inc. (DPLO): Overall growth remains exceptional, execution solid, and market

trends mostly favorable. Hepatitis C is a known headwind but DPLO is outperforming the market and profit impact is less pronounced than revenue mix suggests. Other therapeutic categories like oncology and infusion continue to be very strong. Consistent with prior messaging, our call is about years, not quarters, and we’d be accumulating shares on the recent pullback. Risks include acquisition integration, narrow networks, supplier and drug concentration, and premium valuation.

McKesson Corporation (MCK): We remain confident that the MCK healing process is underway.

The Walmart expansion builds on cost alignment actions and several strategic M&A announcements to lay a foundation for better growth post FY17 while the Technology Solutions exit should ultimately unlock value for shareholders. Near-term drug distributor concerns are valid, but major elements of the long-term sector thesis are unchanged. MCK was the first to fall, but is not broken and will likely be the first to recover. Risks include changes in brand and generic price inflation, potential Rite Aid loss (we already exclude), customer concentration, and acquisition integration.

PRA Health Sciences, Inc. (PRAH): We were table pounding buyers of PRAH after a mixed

reaction to a great 2Q16 report and despite a healthy rally since the quarter, we would keep accumulating here. We expect stock to trend toward $60 near term which is 20x $3 2017 EPS. As of last update PRAH was finalizing a significant client contract. We don’t have visibility yet but think that this new account win could catalyze raising estimates. Risks include financial leverage, acquisition integration, and future private equity share distributions.

Life Science Tools & Diagnostics:

Thermo Fisher Scientific Inc. (TMO): Best idea based on solid execution history, diverse-end

markets, healthy margin expansion, and attractive financial profile. TMO should benefit this year from stable-to-improving end-markets, emerging market strength, new product launches, and incremental capital deployment. Risks include acquisition integration, IP development and defense, capex exposure, rapid technological change within industry, and foreign currency exposure.

NanoString Technologies, Inc. (NSTG): Best idea based on large addressable market, well-vetted

nCounter platform, multi-year pipeline projects, and potential to be near cash-flow breakeven in 2016. Catalysts include increasing SPRINT benchtop placements, potential companion diagnostics collaboration upside, improved Prosigna positioning, and 3D Biology menu expansion. Risks include losses since inception, dependence on customer R&D spend, lengthy and variable sales cycle, regulatory risk, and challenging reimbursement dynamics.

Healthcare Information Technology:

athenahealth, Inc. (ATHN): Investors seem worried/skeptical around ATHN's ability to achieve 2H

targets; however, the revenue outlook reflects normal seasonality (going back 10-years). Additionally, underlying bookings trends remain very solid (especially hospital), and we think the stronger 2015-2016 bookings growth (vs. weaker 2013-2014) should drive accelerating revenue trends in 2017. ATHN's stock typically troughs at 4x revenue, and we think the recent selloff proves to be a good long-term entry-point. Key risks include: (1) Cloud/SaaS valuation multiples; (2) heightened investment in infrastructure and growth; and (3) ability to successfully develop new products.

Cotiviti Holdings, Inc. (COTV): COTV has established a dominant position within the payment

accuracy market, and the need to curb HC spending should support a long tail of growth. 2Q results



were significantly ahead of Street expectations (19% revenue growth, 13% EBITDA beat), and supports the company’s 10-12% growth outlook. Additionally, guidance looks conservative and recent implementation activity provides strong visibility for 2017+. COTV is one of our preferred HCIT ideas, underpinned by solid organic growth, high margins/FCF, yet below-peer valuation. Key risks include: (1) HCIT valuation multiples, (2) client concentration, (3) payer consolidation, and (4) merger and technology integration.

Allscripts Healthcare Solutions, Inc. (MDRX): Client base has stabilized and visible margin

opportunities should support an improving growth trajectory and FCF profile. 2Q16 results were mixed on an absolute basis, but offset by record bookings and a significant partnership with OptumCare. In our view, the upside themes for MDRX remain firmly intact (multi-year margin expansion, and FCF), and the Netsmart JV and OptumCare partnership should improve growth in 2016-2017+. Key risks include: (1) highly competitive market for HCIT-related solutions, (2) balance sheet leverage, (3) information security-related risks, and (4) M&A-related risks.

Medical Technology:

Cooper Companies, Inc. (COO): COO has recently gotten back on track and is starting to settle

into a more consistent pattern of growing a couple points above the worldwide contact lens market’s +4-6%, while numerous gross and operating margin leverage opportunities also seem to exist for the company. On this latter point, we’d point to recent new product launches and/or manufacturing improvements that should drive gross margins higher across four of the company’s largest and most important product lines. With COO also being best positioned, in our opinion, to take advantage of the ongoing shift to both dailies and daily SiHy lenses that is currently happening across the globe, we are comfortable that COO can remain a premium medtech grower, delivering 5-7% organic revenue and low-teens+ EPS for at least the next several years, during which time we also expect annual FCF generation to improve from roughly $200M annually in recent years to closer to $400-$500M annually over coming years. Risks include leverage to consumer spending trends, increasing competition, MyDay and clariti sales strategy, and the sustainability of COO's low tax rate.

Zimmer Biomet Holdings, Inc. (ZBH): ZBH is the clear market leader in the $13B worldwide recon

(hip and knee) market, and while we see a number of secular risks for this market over time, we also believe ZBH has several catalysts that should help support “medtech-like” 3-5% revenue and 8-10% EPS growth over coming years. Specifically, we believe that following the merger of Zimmer and Biomet last year, the combined company is well positioned to internally develop and fill product gaps each company had at time of deal, while recent efforts by ZBH to acquire faster growing assets (LDRH, Cayenne, Medtech) should also help. Additionally, numerous cost-synergies, cash flow, and tax rate benefits from the Biomet merger still seem to exist. As ZBH more consistently delivers this medtech-like growth, we believe the discount these shares currently carry vs. large cap medtech can narrow (currently ZBH trades ~15x NTM EPS vs. peers at 18-19x NTM EPS), in turn pushing shares into the low/mid-$140s over the coming year. Risks include leverage to slower growing (+2-4%) large joint recon market, hip/knee pricing risk, revenue dis-synergies associated with recent acquisitions (namely Biomet, but also LDRH, Cayenne, and Medtech), and exposure to emerging markets (~7-8% of revenue) that have experienced choppy demand of late.

Human Capital Technology & Services:

AMN Healthcare Services, Inc. (AHS): AHS is currently experiencing the strongest demand

environment since the early 2000s and valuation remains attractive relative to potential earnings growth. While some organic growth moderation is expected due to tough comps, the potential for margin expansion and EPS growth remain quite strong. With the supply/demand environment expected to persist, its possible for AHS to continue to grow EPS north of 15% for the next several years vs a current P/E NTM of 14.4x. While bears may point to slowing hospital admission trends as a sign that fundamentals likely deteriorate in the future, we note that orders continue to materially outpace supply (which is limited) and not likely to achieve a balance for several years. Previous supply/demand imbalances have taken roughly four years to resolve, we are two years into a much more dramatic imbalance than prior periods. We believe solid EPS growth can continue due to the continued rapid adoption of the higher margin workforce solution offerings (25% of operating profit), improving Locums gross margin and operating leverage. Key risks for AHS are cyclical sensitivity, inability to recruit clinicians and physicians, changes in healthcare regulation, acquisition integration and bill/pay spread contraction for certain contracts in periods of high demand.



Facilities & Services:

AmSurg Corp. (AMSG): AMSG is our top Outperform-rated idea based on: (1) the EVHC merger

makes AMSG a better company and enhances the overall organic growth outlook, addressable market and ROIC trajectory. (2) It’s too hard to overlook the internal cross-selling and cost-reduction opportunities within both companies current client base. (3) We expect the newco can re-rate closer to 20x cash earnings, as growth opportunities come into focus. (4) The newco should prove to be a compelling cost containment play to hospital partners through greater clinical coordination and integration among service lines. Risks include government reimbursement, M&A integration, and balance sheet leverage.

HCA Holdings, Inc. (HCA): HCA is our top Outperform-rated hospital idea based on: (1) an

exceptionally undemanding valuation at ~11x EPS; (2) incredibly flexible balance sheet and efficient cash flow generation; (3) an active stance on buybacks and capital deployment upside; (4) ACA-driven upside over 2017-18; and (5) strong end-market dynamics with consistent volume growth. Risks include government reimbursement, ACA legal challenges, balance sheet leverage, and MCO consolidation.

HealthSouth Corporation (HLS): HLS is our top Outperform-rated post-acute idea based on: (1)

HLS has reported over 30 quarters of positive SS discharge growth, and remains tethered to strong inelastic demand drivers; (3) HLS's IRF patient mix is heavily focused "away" from orthopedic cases, and we think "bundling" risks are over-played; (4) FCF remains strong (~10% yield), and HLS has $2/share in NOL value; (5) de novo's, acquisitions, and modest core growth set up upside vs. our model/guidance; (6) we sense buybacks/increased dividends are an upside risk factor; and (7) upside from continued progress within their clinical collaboration strategy between IRFs and Home Health agencies. Risks include government reimbursement, M&A integration, evolving payment models, and balance sheet leverage.

Universal Health Services, Inc. (UHS): UHS is one of our top Outperform-rated hospital ideas

based on: (1) psych policy tailwinds are abundant; (2) optionality on the IMD; (3) acute trends remain good, given strong end-market dynamics; (4) we're optimistic a host of new acute care capital projects (Vegas and DC) drive upside; (5) we figure UHS can generate north of $1b in two-year FCF; and (6) capital deployment remains a upside risk factor. Risks include government reimbursement, market concentrations (Las Vegas, Texas), ACA legal challenges, and DOJ criminal investigations.

Biotechnology:

Axovant Sciences Ltd (AXON): With a whole host of readouts planned for the next 12-16 months

and a potential NDA filing in one of the largest markets in the U.S., Alzheimer’s disease, Axovant is positioned for some strong growth by the end of 2017. We think the stock is often overlooked, as investors turn towards disease-modifying therapies for early Alzheimer’s, such as Biogen’s aducanumab, ahead of symptomatic therapies in development for more advanced Alzheimer’s patients. Axovant’s intepirdine (RVT-101) is set to complete registrational studies in 2017 after which the company plans to submit an NDA. Risks to the thesis include clinical performance for intepirdine or one of the company’s other assets, regulatory risk in that even if Axovant’s assets succeed in the clinic, they may not be approved by the regulatory authorities, competitive risk, and financing risk due to the company’s lack of current revenues.

BioMarin Pharmaceutical Inc. (BMRN): BioMarin is a leader in the orphan disease space with a

strong diversified base business and robust, late-stage pipeline. The base business continues to grow and remains on track to reach sales >$1B in 2016 (guidance raised to $1.1B following 2Q earnings) and the company remains committed to managing operating expenses to drive bottom-line profitability in 2017 (non-GAAP breakeven or better). Additionally, late-stage pipeline assets could more than double revenues in coming years. Key late-stage developments include pending US approval for Brineura for CLN2 disease in January 2017, regulatory filing for pegvaliase in PKU in 4Q16/1Q17, and updated Phase 2 vosoritide date in achondroplasia in 2H16, with a Phase 3 study expected to begin by YE16. Additionally, BMN 270 has demonstrated encouraging, early proof-of-concept data in hemophilia A with the start of a Phase 2b study expected mid-2017. Risks include lower-than-expected sales for the base business and clinical or regulatory setbacks.

Curis, Inc. (CRIS): Curis recently initiated a Phase 2 study with CUDC-907, the company’s most

advanced pipeline asset, in MYC-alterated DLBCL patients, based on high response rates in this



subset of lymphoma patients in Phase 1. Based on the DLBCL opportunity alone, when comparing to comps with similar drugs in development, such as EPZM, we think the company is undervalued. We actually believe the larger opportunity for Curis lies in CA-170, the company’s oral PD-L1/VISTA inhibitor which recently entered the clinic. A second oral checkpoint inhibitor, targeting PD-L1 and TIM3, is heading towards a potential IND later this year. We see both oral checkpoints as attractive opportunities for Curis due to the estimated valuation of the PD-1/PD-L1 market ($80-100B) and limited non-PD1/L1 targeted checkpoint inhibitors in clinical development. With the only known oral checkpoint in the clinic in hand, and another potential oral checkpoint combo that could be in the clinic next year, we think Curis remains heavily undervalued. Risks for the stock include clinical trial progress and performance for both CA-170 and CUDC-907, commercialization for Erivedge, competition in the oncology space, and regulatory hurdles.

Neurocrine Biosciences, Inc. (NBIX): Neurocrine is a development-stage biotech company

focusing on movement disorders and women’s health. The company’s lead internal asset, valbenazine (branded as Ingrezza), was recently submitted to the FDA for a potential mid-2017 approval in tardive dyskinesia (TD), a movement disorder caused by the use of antipsychotic drugs. If approved, valbenazine would be the first drug approved for TD. In addition to TD, the drug is in development for Tourette syndrome. Two Phase 2 readouts in Tourette, set for later this year/early next year, are the next short-term catalysts for the stock. The company also has a drug in development in collaboration with AbbVie, elagolix, which is on track for a 2017 NDA submission in endometriosis. Risks to the stock include clinical performance, third-party risk in AbbVie’s ability to launch and market elagolix, regulatory risk in the reviews for valbenazine and elagolix, and commercial risk, including potential competition from Teva in tardive dyskinesia.

Ultragenyx Pharmaceutical, Inc. (RARE): Ultragenyx is a leading rare disease biotech company

with a robust pipeline that has a number of meaningful near term catalysts with the potential to drive upside. Positive Phase 3 data for rhGUS in MPS7 were recently provided and support regulatory approval, in our view, with filing expected in 1H17. Of note, this marks the first of several updates for the late-stage pipeline expected in 2H16, and we expect momentum to build though the back half of the year. Updated Phase 2 data for KRN23 in pediatric XLH will be provided later this month (ASBMR Sept 16-19, Atlanta), which we expect to support conditional regulatory filing in Europe around YE16. For UX007 (triheptanoin) data from Phase 2 trials in FAOD (including medical event rates) and Glut1 seizure patients are both expected in 2H16. Additionally, a CHMP decision on conditional approval of Ace-ER in GNE myopathy is expected in 2H16 with a final decision in 1H17. Risks include clinical trial failures, an inability to gain regulatory approvals, and commercial challenges.


Appendix - Important Disclosures and Analyst CertificationApproved on 8 September 2016 22:27EDT/ Published on 9 September 2016 01:00EDT.

Covered Companies Mentioned

All stock prices below are the 09/08/2016 closing price.

Acadia Healthcare Co., Inc. (ACHC - $52.97 - Outperform)Achillion Pharmaceuticals Inc. (ACHN - $8.57 - Outperform)Addus HomeCare Corp. (ADUS - $25.73 - Neutral)Align Technology, Inc. (ALGN - $95.40 - Outperform)Allscripts Healthcare Solutions, Inc. (MDRX - $12.82 - Outperform)Amedisys, Inc. (AMED - $49.90 - Neutral)AmerisourceBergen Corporation (ABC - $87.27 - Neutral)Amicus Therapeutics Inc. (FOLD - $7.04 - Neutral)AMN Healthcare Services, Inc. (AHS - $36.26 - Outperform)AmSurg Corporation (AMSG - $69.37 - Outperform)Axovant Sciences Ltd. (AXON - $16.03 - Outperform)BeiGene, Ltd. (BGNE - $31.58 - Outperform)BioMarin Pharmaceutical Inc. (BMRN - $97.44 - Outperform)Cardinal Health, Inc. (CAH - $80.71 - Outperform)Cempra Pharmaceuticals (CEMP - $22.81 - Outperform)Cerner Corporation (CERN - $64.14 - Outperform)Cerus Corporation (CERS - $6.48 - Outperform)Charles River Laboratories (CRL - $81.55 - Outperform)Community Health Systems, Inc. (CYH - $11.48 - Neutral)Computer Programs & Systems Inc. (CPSI - $25.33 - Neutral)Cotiviti Holdings, Inc. (COTV - $33.40 - Outperform)Curis, Inc. (CRIS - $1.90 - Outperform)DENTSPLY Sirona, Inc. (XRAY - $60.35 - Outperform)DexCom, Inc. (DXCM - $95.80 - Neutral)Diplomat Pharmacy, Inc. (DPLO - $32.76 - Outperform)Enanta Pharmaceuticals, Inc. (ENTA - $23.33 - Neutral)Exactech, Inc. (EXAC - $28.00 - Outperform)Exact Sciences Corporation (EXAS - $19.74 - Outperform)Fitbit, Inc. (FIT - $14.72 - Neutral)Fresenius Medical Care AG & Co. KGaA (FMS - $45.01 - Neutral)HCA Holdings, Inc. (HCA - $77.98 - Outperform)HealthEquity, Inc. (HQY - $35.00 - Neutral)HealthSouth Corporation (HLS - $41.32 - Outperform)Henry Schein, Inc. (HSIC - $164.12 - Outperform)HMS Holdings Corp. (HMSY - $22.28 - Outperform)ICON plc (ICLR - $76.42 - Outperform)INC Research Holdings, Inc. (INCR - $43.38 - Neutral)Innoviva, Inc. (INVA - $11.60 - Neutral)Insulet Corporation (PODD - $43.63 - Neutral)Intercept Pharmaceuticals, Inc. (ICPT - $152.55 - Outperform)Karyopharm Therapeutics Inc. (KPTI - $9.22 - Outperform)LifePoint Health (LPNT - $59.30 - Outperform)MEDNAX, Inc. (MD - $67.29 - Outperform)Meridian Bioscience, Inc. (VIVO - $19.60 - Neutral)NanoString Technologies, Inc. (NSTG - $16.66 - Outperform)Natera, Inc. (NTRA - $10.59 - Outperform)Neurocrine Biosciences, Inc. (NBIX - $50.50 - Outperform)NewLink Genetics Corporation (NLNK - $10.33 - Outperform)Nivalis Therapeutics, Inc. (NVLS - $7.90 - Outperform)Owens & Minor, Inc. (OMI - $34.18 - Underperform)Oxford Immunotec Global PLC (OXFD - $11.03 - Outperform)Paratek Pharmaceuticals, Inc. (PRTK - $13.72 - Outperform)PAREXEL International Corporation (PRXL - $67.04 - Outperform)Patterson Companies, Inc. (PDCO - $46.66 - Neutral)



Premier, Inc. (PINC - $31.65 - Outperform)Proteon Therapeutics, Inc. (PRTO - $9.42 - Outperform)Quality Systems, Inc. (QSII - $12.06 - Neutral)Tandem Diabetes Care, Inc. (TNDM - $7.40 - Outperform)Team Health Holdings, Inc. (TMH - $35.29 - Neutral)Tenet Healthcare Corporation (THC - $24.67 - Outperform)Tesaro, Inc. (TSRO - $94.77 - Outperform)The Advisory Board Company (ABCO - $43.47 - Neutral)The Cooper Companies (COO - $186.74 - Outperform)Theravance Biopharma (TBPH - $31.16 - Neutral)Ultragenyx Pharmaceutical Inc. (RARE - $69.65 - Outperform)Universal Health Services, Inc. (UHS - $121.55 - Outperform)Varian Medical Systems, Inc. (VAR - $97.00 - Neutral)Wright Medical Group, Inc. (WMGI - $24.05 - Outperform)(See recent research reports for more information)

1 Robert W. Baird & Co. Incorporated makes a market in the securities of ABC, ABCO, ACHC, ACHN, ADUS, AHS, ALGN, AMED,AMSG, AXON, BGNE, BMRN, CAH, CEMP, CERN, CERS, COO, COTV, CPSI, CRIS, CRL, CYH, DPLO, DXCM, ENTA, EXAC, EXAS,FIT, FMS, FOLD, HCA, HLS, HMSY, HQY, HSIC, ICLR, ICPT, INCR, INVA, KPTI, LPNT, MD, MDRX, NBIX, NLNK, NSTG, NTRA,NVLS, OMI, OXFD, PDCO, PINC, PODD, PRTK, PRTO, PRXL, QHC, QSII, RARE, TBPH, THC, TMH, TNDM, TSRO, UHS, VAR,VCRA, VIVO, WMGI, WST and XRAY.

2 Robert W. Baird & Co. Incorporated and/or its affiliates managed or co-managed a public offering of securities of AmSurg Corporation,Axovant Sciences Ltd., BeiGene, Ltd., Cotiviti Holdings, Inc., Exact Sciences Corporation, Nivalis Therapeutics, Inc., TheravanceBiopharma and Vocera Communications, Inc. in the past 12 months.

3 Robert W. Baird & Co. Incorporated and/or its affiliates have received investment banking compensation from AmSurg Corporation,Axovant Sciences Ltd., BeiGene, Ltd., Cotiviti Holdings, Inc., Exact Sciences Corporation, ICON plc, Nivalis Therapeutics, Inc., ParatekPharmaceuticals, Inc., Theravance Biopharma and Vocera Communications, Inc. in the past 12 months.

10 Robert W. Baird & Co. Incorporated and/or its affiliates have been compensated by Henry Schein, Inc. and DENTSPLY Sirona, Inc.for non-investment banking-securities related services in the past 12 months.

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