Dive Brief:

• The Delaware Court of Chancery ordered Hillrom to complete its acquisition of cardiac wearables maker Bardy Diagnostics after the court found recent Medicare rate cuts for long-term cardiac monitoring did not meet the threshold for a material adverse event, which Hillrom argued to end the deal.
• In the opinion, decided July 9, Vice Chancellor Joseph Slights III sided with BardyDx, writing that recently reduced Medicare rates do not qualify as a long-term detriment to BardyDx's business as questions still remain regarding where rates will ultimately end up. According to Slights, Hillrom failed to prove that the Centers for Medicare and Medicaid Services or Novitas Solutions, the regional Medicare rate setter that cut prices, would not be revised. While the judge sided with BardyDx in the overall argument, Slights did not grant the company compensatory damages.
• Hillrom said in a July 12 statement the company plans to appeal the decision in the Supreme Court of Delaware and the decision does not impact its 2021 guidance. 

Dive Insight:

Hillrom announced the $375 million planned acquisition of BardyDx in January. The deal came in what was a buy-up of nearly every major player in the wearable cardiac monitoring space, except the market-leading iRhythm Technologies. The space had been touted by Wall Street as a fast-growing market still under-penetrated as patients further embrace wearables, such as cardiac monitors and diabetes management devices.

However, the cardiac wearables space took a hit in December 2020 when CMS did not establish a national price for the devices and services despite issuing permanent Medicare codes. The decision pushed pricing to Medicare Administrative Contractors (MACs), and Novitas Solutions, which process the majority of long-term cardiac monitoring claims, dramatically cut rates in January.

The rate cut was a shock to companies and analysts, casting doubt over the future of the market and throwing iRhythm's stock price into a downward spiral. Novitas' January rates cut reimbursement for BardyDX's Carnation Ambulatory Monitor device, the company's single product, from $365 per monitoring patch to between $40-$50, according to court documents.

Hillrom notified BardyDx that it was canceling the deal on Feb. 21, three days before the acquisition was set to close, citing material adverse events that altered the original terms. That led BardyDx to challenge HIllrom's decision one week later.

But the pricing saga was not yet over. Novitas updated its January rates in April, increasing pricing for BardyDx devices to about $133, still below the previous rate, according to the opinion.

Slights ruled Hillrom failed to prove the rate cuts are a long-term detriment to BardyDx's business and that Hillrom failed to show that the Medicare rates would not, or are unlikely to, be revised again.

The judge also called out the lack of expertise of a Hillrom witness who claimed the reduced January Medicare rates were unlikely to be changed.

"The practical implications of her lack of relevant experience were on full display when she stated definitively in her initial report that Novitas would not adjust the January Novitas Rate only to be told months later that Novitas did just that when it announced the upwardly-adjusted April Novitas Rate," Slights wrote.

Slights also directly countered the witness' claim that April rates are not likely to be increased any time soon, writing the "lack of meaningful factual foundation for this bodement makes it no more useful than a Zoltar-told fortune."

Meanwhile, Slights said BardyDx's witness had expertise in CMS and MAC pricing and convinced the judge that CMS or Novitas could once again increase rates, either in 2021 rulemaking or at least by 2023. Slights cited the witness' correct prediction that the original January rate cuts would be revised up.

"While Hillrom argues Novitas is unlikely to change the April Novitas Rate because, in the past, it has maintained its pricing decisions for extended periods ... In unprecedented times, history makes for a poor guide. Novitas' recently erratic pricing behavior thus limits the utility of its historical pricing habits when predicting whether it will re-revise its rates," Slights wrote.

In the final conclusion, the judge wrote that even if Hillrom proved a "durationally significant effect" due to the rate changes, Medicare reimbursement rates were carved out of the material adverse event definition in the deal and Hillrom failed to prove that Bardy was disproportionally impacted compared to similar companies in the industry.

Baird analyst Mike Polark said uncertainty remains for the deal as Hillrom is challenging the ruling and decision for the appeal could be months away.

"We tend to think that despite the draconian rate reductions, there is still a viable profit model here. However, the model of the future for an extended external ECG IDTF unlikely looks anything like what Hillrom underwrote," Polark wrote in a July 12 note.

A potential future path for Hillrom may be to sell BardyDx at a "heavy discount, take the bath, and move on," the analyst noted.