Hillrom's retreat from $375M Bardy Diagnostics acquisition countered in court

Hillrom says that lower-than-expected reimbursement rates proposed in late January void the deal. But the cardiac-monitoring device maker asserts they were accounted for during negotiations.
By Dave Muoio
03:23 pm
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A January acquisition deal between medical technology provider Hillrom and cardiac monitoring device maker Bardy Diagnostics has landed in rocky waters, with Hillrom looking to back out of the purchase and Bardy filing a legal complaint to keep things moving forward.

According to press releases from Hillrom, the company was caught off guard on January 29 when Novitas Solutions, a Medicare Administrative Contractor (MAC), published reimbursement rates for relevant CPT codes that were well below its expectations.

Hillrom said the rate reduction meets the criteria of a "Company Material Adverse Effect," voiding the $375 million acquisition deal it made with Bardy.

The monitoring device maker was not of a similar mindset, and this weekend filed a complaint in the Delaware Court of Chancery petitioning the court to compel Hillrom "to honor their clear obligations" and close the merger prior to April 15 while compensating for damages.

"The Buyers’ failure to close the Merger is a breach of the Merger Agreement that, unless remedied by specific performance, will result in irreparable harm to BardyDx and its stockholders," Bardy wrote in the complaint.

The court filing outlines a general time line of Bardy and Hillrom's negotiations as well as developments in the pricing of long-term ambulatory cardiac-monitoring services reimbursement.

Bardy wrote that both parties first met in January 2019 and began negotiations in earnest in March. Of particular note, an indication of interest executed by both parties priced the acquisition at $450 million up front, plus two additional earnouts. Hillrom then reduced its offer in December after word broke that CMS would defer reimbursement rate determination to regional MACs like Novitas, according to the filing.

"Because the likelihood for a change in reimbursement rates was a front-and-center issue during the negotiation (and renegotiation) of the Merger Agreement, BardyDx insisted, and Hill-Rom specifically agreed, to expressly carve out changes in Health Care Laws from the definition of Company Material Adverse Event," Bardy wrote in the filing, where "Health Care Laws" was said to include rules and guidelines from CMS or Novitas.

"Hill-Rom was adequately protected from the risks of a potential change in reimbursement rates by the earnout structure, which was expressly intended to accommodate changes in the reimbursement rates and guidelines published by Medicare or Medicare contractors like Novitas."

Bardy went on to stress that that Novitas' provisional reimbursement pricing did not have a disproportionate impact on Bardy compared to its direct competitors in the cardiac-monitoring device space – another condition also tied to the merger's definition of a Company Material Adverse Effect.

The companies' original agreement required the merger to close on or before February 25, assuming all necessary conditions were met by February 22. Hillrom has refused to close, Bardy wrote, and in declaring a Company Material Adverse Effect is "in reality, ... using the provisional reimbursement change and resulting uncertainty as a pretense to escape the deal it struck or to attempt to force (another) re-negotiation of the Merger’s terms."

Bardy declined to comment to MobiHealthNews outside of what was written in the court filing. A representative of Hillrom said that its public comment on the litigation is limited to its press release statements.

"As a result of the unexpected Novitas reimbursement rate reduction, Hillrom has asserted that a 'Company Material Adverse Effect' has occurred, and therefore the closing conditions have not been satisfied." Hillrom wrote in the Monday release. "Hillrom remains committed to creating long-term shareholder value and will provide further updates as appropriate."

WHAT'S THE IMPACT?

In addition to the "immediate irreparable harm" caused by the cancelled nine-figure deal, Bardy wrote that "the delay in Closing will negatively affect BardyDx’s business prospects, the ability to finance its operations, and employee morale and may also impact customer purchasing decisions. Accordingly, BardyDx requires expedited relief to avoid further irreparable harm."

Bardy has a team of 230 employees who would be joining Hillrom, according to the original deal announcement, and an existing revenue stream of $30 million annually.

THE LARGER TREND

More broadly, the proceedings are an example of the impact shifting reimbursement rates can have on individual segments of the digital health sector.

Whereas ambulatory ECG services ranging from two to 21 days previously were reimbursed from $311 to $365 per test as a "Category III" code, Novitas' proposed shift to a "Category I" rate of $49 per test was enough to make Hillrom balk on its purchase.

In this case, Bardy said that it has banded together with competitors iRhythm, Preventice and Biotelemetry to challenge the provisional rates, under the belief that Novitas "conflated" ambulatory ECG monitors with Holter monitors that were priced similarly.

Of particular note, both Preventice and BioTelemetry recently announced and underwent their own acquisitions – a $925 million deal with Boston Scientific for the former, and a $2.8 billion deal with Philips for the latter. Meanwhile, market leader iRhythm highlighted the ongoing discussions with Novitas as a relevant business concern to its shareholders in an earnings call held last week.

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