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What happened

Following a big drop in its shares yesterday that was caused by potential Medicare reimbursement headwinds, Intersect ENT (NASDAQ:XENT) reported third-quarter financial results that reassured investors and sent shares rallying 12.5% higher today at 2:30 p.m. EDT.

So what

On Nov. 1, the Centers for Medicare & Medicaid Services (CMS) released the 2017 Medicare Hospital Outpatient Final Rule, implementing comprehensive ambulatory payment classification (APC) for upper airway procedures, including sinus surgery. The ruling for upper airway procedures, including sinus surgery, includes reimbursement at a fixed amount that's 40% to 50% below the current average amount. The ruling goes into effect on Jan. 1.

The ruling led to J.P. Morgan downgrading Intersect ENT shares from overweight to neutral yesterday. J.P. Morgan also reduced its price target to $16 from $25. Between the ruling and J.P. Morgan's downgrade, Intersect ENT's shares tumbled by more than 40% on Wednesday.

However, Intersect ENT's third-quarter conference call after the bell yesterday assuaged some of investors' fears. Management thinks that the CMS decision only directly impacts about 8% of its sales, and it doesn't expect any short-term changes in reimbursement from commercial insurers. 

The company also said that sales of its Propel and Propel mini steroid-releasing implants, which are used in chronic sinusitis surgeries, grew 29.8% year over year to $18.47 million in the third quarter and that its third-quarter loss was $0.22 per share, or $0.05 better than industry watchers were predicting. 

Now what

Intersect ENT's not out of the woods yet. CEO Lisa Earnhardt was reassuring, but it did appear that she left the door open for some pricing risk longer term. Earnhardt's team is continuing "to assess the impact of the Medicare ruling" and the use of the words "near term" when describing their thinking that there will be "little to no impact" on non-Medicare business could be telling.

However, Intersect ENT does have some things going for it. The company has $108 million in cash and investments on the books and it expects its use of cash to be around $23 million this year. That suggests it's got enough funding to continue to grow demand for its products, including new products that it hopes to see hit the market over the coming year. Assuming that Intersect ENT can limit the risk of pricing pressure (perhaps via getting its own CMS J-code for payment), then this stock could end up being a bargain-bin buy sometime next year.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this.

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