Tag / Berkshire Hathaway

by Frank Maduri

Amazon Targeting Expansion Into Healthcare

Amazon announced a partnership with Berkshire Hathaway and JP Morgan to provide better healthcare for the employees of the three respective American corporate giants. The details of the exact parameters of the newly formed joint venture are unclear. It appears that the partnership will not be to form a healthcare company to compete with major health insurers.

However, the announcement certainly shook up the industry: from Wall Street to Main Street, everyone was talking about this news on Tuesday. The prospect of these three companies getting involved in the evaluation of costs is a daunting set of circumstances for the healthcare industry.

In addition, Amazon is rumored to be targeting expansion into the pharmaceutical area. The online retail giant filed for pharmaceutical licenses in a handful of states back before the holidays, but it is unclear whether they were related to the medical devices which they already sell on their site.

The strategy and route for Amazon into this space is through this partnership with Berkshire Hathaway and JP Morgan. The stakes for certain retailers or interested parties in the pharmaceutical industry could be very significant. The other side of the situation is the protection of patient records should Amazon start peddling prescription drug delivery services.

The potential for misdirected prescription abuse is also at stake here should Amazon enter the prescription drug space. This is all transpiring amid the backdrop of a prescription painkiller abuse epidemic in America.

Those are just some of the ethical issues presented in this situation. The business implications are also significant with the “Big Pharma” companies falling somewhere in between the distributors and the retail drug chains. The sentiment within the pharmaceutical manufacturers is that the potential entry of Amazon into the industry would be a welcome turn of events because it would provide greater competition.

The translation there is that the pharma companies have been at odds with the PBMs (Pharmacy Benefit Managers) for years. The PBMs handle mail order prescriptions and they negotiate prices for the large insurance companies and for large corporations that have a bigger “say” in the benefits for their employees.

The insertion of Amazon into the equation is problematic for the PBMs such as Express Scripts, CVS Caremark, and United Health/Optum. They will have diminished leverage in negotiating pricing and other terms with the pharmaceutical companies because Amazon will essentially disrupt the way that game has been played. This is why the pharmaceutical companies have no problem with Amazon entering the space, the online retail behemoth is going to look to undercut the other players in the mix.

The potential entry of Amazon into prescription drugs will also hinder the prescription drug distributors, particularly the top three: McKesson, Amerisource Bergen, and Cardinal Health. Amazon is going to push back on them on price and that is going to squeeze their margins. The massive consumer base that Amazon will bring to the table and could command with greater potential for consumers to join Amazon Prime membership just for the prescription drug services will put these distributors in a tough position.

The entry of Amazon would shift the distribution paradigm as well. Their presence would shape the cost structures for that component of the industry. The benefits would definitely be reaped by the consumer because it will have a domino effect on the prescription drug pricing across the board.

The final area is the retail prescription drug channel, which if Amazon does indeed enter this part of the industry it could have a profound impact on the entire industry. The biggest players that would be at risk in that scenario are: CVS, Walgreens, and Rite Aid.

Those three companies have existed for decades by servicing customers through predominately brick and mortar operations where the customer or patient will pick up their prescription products. These companies have delivery services available in some markets as well.

However, Amazon would turn that part of the industry on its head, so to speak, and reinvent the way that patients would get their prescriptions. The concept of ordering a prescription online, or through a voice- controlled device such as the Amazon Echo, one would think would be a compelling option for consumers.

There is a definite argument for the convenience that Amazon would provide to someone who was feeling too ill to drive to the pharmacy to get a prescription. It is appealing to people with busy lives as well, who need maintenance meds for a given medical condition to eliminate having to run over to the pharmacy from their routine thereby saving that time.

The retail pharmacy chains mentioned earlier would certainly have to adapt in the advent of Amazon potentially entering that sector. The strategy to combat Amazon would be two-pronged, in my opinion, in order to create resistance to Amazon grabbing too much market share.

First, the retail pharmacy chains can tout that they can fill prescriptions in one hour or less. The order of a prescription through Amazon will take more time to fill, so if you are sick (and the fact remains that being sick is when most people see a doctor and need prescriptions filled) the traditional retail route is still the most effective method.

Next, is an adaptation of the retail pharmacy operation into a true omnichannel approach. This approach is key to the survival of essentially every traditional retailer with a brick and mortar presence moving forward. The CVS, Walgreens, and Rite Aid chains and others in a regional presence have to consider developing delivery in most every market they serve. They also have to develop some type of website portal that can handle prescription orders for delivery to the consumer. This would allow for a truly omnichannel approach.

The patient prescription history and personal data are already in their database so these chains can tout the security and trust they have established with the patient over a period of time. This could become their pathway to remaining relevant with Amazon actively competing in the channel.

The patient confidentiality issues which were raised earlier in this piece still have significance as Amazon weighs whether to enter the pharmaceutical space or not. The potential for prescriptions to fall into the wrong hands is an aspect of this situation that should be careful considered by the government with respect to Amazon.

Conversely, that argument can be made for the major retailers and PBMs that are currently active in the retail pharmacy channel currently. The way the systems function today certainly provides some openings for the potential for prescription drugs to be misused or used by someone other than the patient it was intended to help. The mail order supply could easily get into the possession of someone who has the propensity to abuse prescription pain medications, anti-depressants, or some other type of pharmaceutical product.

The “Big Pharma” companies seem at this point, from their public statements, to be largely unconcerned with Amazon entering the market. I can understand how some people might be confused by this position. However, when you consider how the industry functions, and through my professional experience in different roles within the pharmaceutical industry, I can attest that the “Big Pharma” guys only care about making money. Amazon will allow them to do that especially with the PBMs.

The PBMs must be concerned about retaining profitability should Amazon enter that area of the industry. The joint venture announced on Tuesday with Amazon, Berkshire Hathaway, and JP Morgan has the healthcare industry shaken up already.

In full disclosure, some reports have also speculated whether Amazon is announcing this partnership to “save face” because of reports that they make their employees who work there for a certain length of time and then leave the company pay back the amount that Amazon paid for the healthcare coverage for that particular employee.

This new partnership could integrate new technology into the sector with rumors that the three companies in the venture will have an employee web portal that will provide healthcare planning information to help reduce the cost of tests and other services for those on their payrolls. The other rumor is that they are going to launch a smartphone app that streamlines healthcare choices and explains the protocols for different procedures very simply.

It is clear though that Amazon wants to get into the healthcare and potentially the pharmaceutical space and that has put everyone from the major health insurers, to PBMs, to those involved in the pharmaceutical retail drugstore segments on notice that changes are coming whether they are ready for them or not.

by Frank Maduri

Mergers & Acquisitions Roundup

The mergers and acquisitions (M&A) activity in this quarter was slow compared to the two most recent quarters in the financial world. The total amount of the deals was reportedly higher in dollar volume than the prior quarter, but the overall M&A picture is overshadowed by the unknown impact of new antitrust policies coming from Washington.

Those policies remain unrevealed to the public by the White House, and has placed most of the potential M&A activity on hold until further details emerge. However, amid all those changes some pending deals made progress and others fell apart. The past few months were still busy when it came to consolidations and other types of acquisitions.

Amazon Enters The Grocery Aisle

Amazon made a bold move into the retail grocery channel by acquiring Whole Foods in an all cash deal in June. The deal will give Amazon a foothold into an industry they have been trying to tap into for a long time without having to spend major capital on leasing or building store locations, training management and staff, as well as developing a distribution network specifically for those stores.

The addition of Whole Foods is going to make Amazon an even greater threat to the other players in the fresh grocery business segment. Amazon plans on keeping Whole Foods operational strategies mostly intact with retaining their business headquarters in Austin and keeping the brick and mortar store experience largely the same.

Walgreens Proposed Merger With Rite Aid Shelved

In the opposite direction, the M&A area was dealt a blow when Walgreens and Rite Aid announced that their long-pursued foray into merging together was being abandoned completely.

This proposed marriage of two of the largest retail pharmacy chains in the U.S. was riddled with issues from the outset. The regulatory boards involved have consistently been concerned with the fact that Walgreens and Rite Aid both had to divest a certain number of stores to meet antitrust requirements. This was further complicated because the industry contains a lack of suitable buyers for those locations.

Walgreens/ Rite Aid identified Fred’s, a largely Southeastern U.S. based chain of both pharmacies and discount type dollar stores, as the partner to absorb the locations that they both would have to sell off in order to meet approval on the merger. The regulators were not sure that Fred’s could double in size basically overnight and survive, especially expanding into the Northeast and other areas where they had no previous presence.

The sheer potential size of a combined Walgreens and Rite Aid ultimately doomed this proposed M&A transaction. Walgreens now has to determine another consolidation strategy in order to compete with CVS Caremark. Rite Aid, while pretty healthy overall with their business, has to be concerned about the tough competition from CVS and Walgreens in the Northeast. They also have to be concerned that another company is going to try to obtain them and absorb them in the short term.

The Big Get Bigger

In perhaps the most under the radar move of the year, AT&T is poised to become even bigger than they are currently with a proposed $85 billion acquisition of Time Warner. This is not just the cable television unit of Time Warner, this is the entire company.

This merger is expected, according to analysts close to the deal, to close and meet all final approval metrics within the next 60 days. This is a controversial merger in the eyes of many in the general public who have justifiable concerns about a multimedia conglomerate with that much influence.

AT&T and DirecTV are the same company, and they will now have control over broadcast channels such as TBS, TNT, CNN, and HLN. This represents a monopoly which can exert pressure upon advertisers and control the message in the media in a way that could be very dangerous.

Some consumers will feel that this is a conflict of interest with AT&T controlling a major satellite television platform as well as a full stable of broadcast channels.

New Rules Coming Soon

The White House will announce some sort of new rules for M&A activity that could make it potentially easier to consummate some of these mega deals. The Dow – DuPont merger looks like it is going to meet regulatory approval regardless of these future changes to the antitrust regulatory requirements.

The rules could allow for less oversight of potential monopolistic deals and could lead to a road where all the consumer is left with are very small “mom & pop” type stores or a store owned by some giant conglomerate with nothing in between.

The Dow-DuPont merger would be one of the largest in history and would be a very complex deal that would eventually create a corporate structure with separate divisions running as autonomous companies based on their shared specialty.

The analysts expect that the Dow-DuPont approval coupled with the regulatory changes could create conditions where M&A activity will ramp up significantly.

The “Q” Gobbles Up HSN

Liberty Interactive/QVC announced on Thursday that they have purchased the remaining stake in HSN (Home Shopping Network) to complete the acquisition of the network. QVC, or “the Q” as it is known in shopping circles, now has control of their top competitor, HSN, and the company is touting the cost savings from the shared core synergies for both networks.

It stands to reason that the systems for ordering and shipping will be upgraded to a unified platform. The knock on HSN is that the ordering process could be more cumbersome and the return process more complicated than that of the processes used by QVC. An improvement to any of those processes at HSN would be a real win for the consumer. This deal is also an indication of how robust the online competition from Amazon and other sites have been to the sales for twenty-four-hour home shopping networks.

Those networks, QVC and HSN respectively, were the advent of online shopping. They provided the first convenience factor of shopping from home, before the genesis of eBay, Amazon, and Craig’s List. Some feel that this merger could be seen as a monopoly, but the reality is that it is a necessary move for the survival of home shopping networks amid intense marketplace competition.

Berkshire Bets Big On Electricity

Berkshire Hathaway and their high-profile owner, Warren Buffet, announced on Friday that they have purchased Oncor, a Texas based power grid leader, for $9 billion in cash.

The acquisition is one of the largest that Berkshire Hathaway has ever undertaken. They are intrigued by the steady demand for electricity and the continued importance of electricity infrastructure in the future.

This move also pulls Oncor out of bankruptcy and into a stable of other companies and brands owned by Berkshire which could provide opportunities for strategic partnerships in energy delivery in the future.

Europe Cracks Down

The news on Thursday that the E.U. has reviewed the M&A activity of certain major players and decided to take punitive steps came as a surprise to some, and as no surprise to others within the business world.

The E.U. is investigating whether GE mislead their regulatory compliance process when the consumer products giant purchased a wind farming operation. The line of defense for GE, according to their spokespeople, is that the company did nothing to intentionally misguide the process. The E.U. law is written in a way that GE should they be found guilty of any wrongdoing would have to pay a fine in excess of one billion dollars.

The E.U. is also investigating Merck (the German company not the American pharmaceutical titan) for a similar matter in a completed merger where the valuations might have been altered to mislead the regulatory powers involved. They also face a hefty fine and the potential for an increased level of scrutiny whenever they decide to consolidate in the future.

The E.U. is also investigating electronics giant, Canon, for some alleged deceptive practices during their purchase of Toshiba’s medical imaging business unit. It would not reverse the acquisition, but it would be a significant fine if guilt is established. The reputation and corporate image of Canon could also take a hit in this situation as well.

The M&A activity has been largely put on hold in recent months. However, some of the largest merger activity could become reality in the next few months. These transactions will have an undeniable impact on the average consumer and will have influence over entire industry segments moving forward. It is important to understand how they can impact you and your family from the way it can impact costs of goods and services. The future will bring more of the same, so stay prepared.