Follow Up: Big Pharma Bust? The Takeda – Shire Merger

The mammoth deal that is the Takeda acquisition of the Ireland-based, Shire Pharmaceuticals, has had more bumps in the road than the New Jersey Turnpike. The regulatory review processes in China, the United States, and the E.U. each had their own type of issues relative to this enormous merger proposal.

The news this week is that now that the regulatory hurdles have been largely negotiated successfully (the European Union approved the deal on November 21) the former chairman of the board of Takeda has now come forward to the media in opposition of the merger.

Kunio Takeda, the last member of the family whose name is “on the door”, so to speak, who served in the top position for a period of 16 years; is against the deal because of the high level of risk the company is taking by swallowing up Shire. The full stockholders meeting which will feature a vote on this controversial strategic move will take place on December 5th.

The former chairman leads a group of investors that is also opposed to the deal and this move yesterday to bring those concerns to the media is a concerted attempt to subvert the perception of this proposed acquisition ahead of the crucial vote on the 5th. The merger is not without scrutiny, as many different factions from industry experts, to Wall Street analysts, to shareholders in Europe and the U.S. alike all had doubts that this merger could ever be consummated.

The risk to Takeda is heightened by their recent purchase of Baxalta, and many within the inner circles of the industry were openly questioning their pursuit of a consolidation of Shire. The Irish drug maker, at that time, had sold off their oncology portion of the business and trying to compete in a rapidly changing pharmaceutical landscape.
Takeda will take on significant debt overall from their own balance sheet, to the costs of pulling together a deal of this magnitude ($62 billion), and taking on the debt that Shire has accumulated on their balance sheet. This is the rationale behind the opposition that is being demonstrated within Takeda in recent days.

The argument could be made that Takeda could have stood pat with their success in diabetes and hypertension medications. The company looks to push through this M&A activity with Shire as a way to crack the Top 10 pharmaceutical companies in the world. It is apparent that some of the regulators have not considered that we have seen “too big to fail” companies in other industries collapse after biting off more than they could chew. It would be a devastating blow to the overall pharma industry if Takeda went down the path to ruin because of this deal.

The original concerns from the beginning of this proposed deal are still lingering around: the value of the return to the shareholders, the debt taken on by Takeda to make it happen, and the overall valuation of Shire being perhaps inflated. These components, both collectively and individually, do not seem to be throwing the merger train off course here, with some industry news outlets reporting that reps from both companies expect that the deal will be completed in the first week of January.

Takeda is looking at the diamonds in the Shire pipeline, but reportedly have looked at other brands in the Shire domain as potential targets for sale to help pay down some of the enormous debt that will be incurred. These two companies on their own are huge, so the redundancy and lost jobs is another functional reality of such a large merger.

It remains to be seen whether the consumer will benefit from this deal, if it will translate into better leverage for the combined company with the pharmaceutical distributors, it could become a scenario where they jump up the prices on medications to help offset the debt load. This is where the consumer concerns over this merger could become an unfortunate reality.

(Some background information and statistics courtesy of Seeking Alpha,, CNN, and Asia Nikkei)

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.

Follow Up: Mylan, Tax Inversion, & The EpiPen Debacle Continues

The controversy behind Mylan and the EpiPen has again taken a prominent role in the news cycle after their highly scrutinized CEO testified before Congress last week. The hearing on Capitol Hill focused on the $608 list price for a two pack of EpiPen product and the many ways that the amount is impacted by what their CEO called a “broken” healthcare system to arrive at a profit number of $100 per two pack of the EpiPen.

Then, the news comes out today that the profit figure of $100 was inaccurate and that Mylan actually makes 60% more in profit per two pack of this life saving product, so the “more accurate” figure is $160 in profit. The members of Congress were upset over the amount of profit they were making when they thought it was $100, I cannot imagine what their reaction was at this news today.

The explanation by Mylan regarding the change in the overall profit amount in this case was that they miscalculated the profits based on an incorrect corporate tax rate (while my fingers type the words – I cannot believe their excuse). The LA Times and CNBC did a great job in reporting this situation today, with the former news source interviewing a USC professor who has a very honest view on how badly Mylan looks after this “miscalculation” of profits.

The question naturally is raised: How can Mylan miscalculate their corporate tax rate? The other question: the corporate tax rate in the US is so high, that should have made their profits even lower if that is accurate?

The answer to the first question is murky, it appears that Mylan knew the tax rate all along and tried to present a different set of profit figures to Congress. The second question could be answered with the facts: Mylan based their original calculation on the standard U.S. corporate tax rate of 37.5% , but Mylan does not pay that rate of corporate taxes due to a tax inversion they completed in the past.

I have reported on tax inversions for years for several news sources, in brief, it is an accounting and business practice where a U.S. company can merge or obtain an overseas company and then change their corporate headquarters address to the country where they bought the controlling interest in the other company. That change in corporate headquarters location means that their corporate tax rate would be adjusted to the tax rate of the country they were now headquartered within.

In the case of Mylan, they completed an inversion to change their corporate headquarters to The Netherlands, so their U.S. tax rate should have been adjusted to about five times less than the current U.S. corporate tax, or around 7%. However, the reality is that some experts have reported to both CNBC and the LA Times that their corporate tax rate is close to zero. That fact is really going to get people angry.

Therefore, the adjusted Mylan numbers for profit are based off of a 7% tax rate in the U.S. which they actually do not pay, so those numbers are wholly inaccurate. The situation gets compounded when the fact remains that they sell about four million of the two packs of EpiPen products per year.

I keep coming back to the timing of this announcement. It has to have been divulged at this time because it was leaked and someone in the media had it or someone threatened the company that it would get released. Mylan had to get out “in front” of this story and even then it will be tough for them to withstand. The fact that they revealed this change in profit numbers today and that they misrepresented those figures to Congress is worthy of a full Congressional investigation into their business practices.

The other fact that this scenario uncovers is that Mylan pays next to nothing in corporate taxes and is still trying to “game the system” and price gouge a lifesaving product to the American public. These tax inversions are a huge problem for our country and they must be stopped, they allow a mechanism for big companies to get bigger and wealthier, while the average person gets a tax increase.

The healthcare system does have a great deal of problems currently, but dishonest corporate officials from a major pharmaceutical company surrounding a multi-billion dollar drug product that families need to provide lifesaving measures for a patient in need is totally outrageous. This completely rapacious behavior and unbridled pursuit of greed by some of these corporations must be halted.

The EpiPen is a product that should be provided at a fair price to the Americans who need it, and Mylan should be ashamed that they conducted themselves in this manner. Please contact your local Congressional representative if you feel that Mylan should be investigated by Congress for their mishandling of this situation. The American people have a right to know the true story behind the profits this company made from their greed driven price gouging of this essential product and we cannot trust their accountants in case they “miscalculate” again.
Mylan is going to find out that this is a firestorm that they will need some serious resolve to withstand and a generic form of the product is not going to make this situation better. In fact the amount of profit they have made is so disturbing to so many people, it will take a long time before this situation is repaired.

There is a hacker online right now who has made the news with a method he put on YouTube which demonstrates how you can take ingredients and make your own EpiPen at home for a lot less. It is these sorts of practices that should could have a disastrous impact on the safety of the drug and that will defeat the purpose that both Mylan and the U.S. government are supposed to protect: the health and well-being of the patient. That is a truly frightening prognosis.

The Great Escape: Pfizer’s Takeover Bid of Allergan

The pharmaceutical giant known as Pfizer is the latest industry giant to pursue the takeover of a smaller competitor in order to relocate their corporate offices overseas to avoid U.S. corporate taxation. In a transaction known as a tax inversion or “inversions” Pfizer is attempting to obtain Allergan, the maker of Botox among other industry leading products, for $150 billion dollars according to many media reports.


Allergan is headquartered in Ireland, which has one of the lowest corporate taxation rates in the world (17%) compared to the U.S. which depending on the size of the company is much higher (it is estimated that Pfizer has a taxation rate around 37%). I wrote an article for UPI previously on this topic when Walgreens mulled a shift of their corporate HQ to the UK and then disbanded the plan (


This news comes amid the reports that the Department of Treasury is about to announce some changes in the rules for mergers and acquisitions which will make it more difficult for companies to complete these type of inversion transactions. The other political force at play here is the election cycle which the issue of inversions will be a hot topic for the 2016 Presidential campaign trail.




The argument made by Pfizer for the defense of this transaction and the justification for it has three different components:


  1. Pfizer will still be spending a ton of money in the U.S. on R&D, employee payroll taxes, and other business spending to boost the domestic economy
  2. The change in HQ to Ireland will allow them to more easily access the foreign currency accounts they have for the business they conduct in their overseas units.
  3. The Pfizer financial advisors have made statements to the media that the bigger issue to the antiquated U.S. tax codes and business regulations which create an environment in their words which is “uncompetitive”.


In fair balance, they make some valid points but the fact remains that Pfizer has joined the ranks of other large companies in the pharmaceutical space and beyond to move their headquarters out of the United States which really negatively impacts the American economy from several perspectives.


First, the government has to make up that gap in the tax revenues they will lose from that corporation (especially one the size of Pfizer) relocating. The next big issue is the loss of the jobs which are generally higher paying and suitable for candidates with a higher level of education. The recent unemployment reports will demonstrate that our domestic economy is lacking those types of higher paying jobs and that millions of people with college and advanced degrees are “underemployed” working several part time jobs to supplement the income of a full time position that does not exist.


It is also bad for the public perception of America to have these corporations relocate and that should be the impetus for Congress and the leaders of businesses to get together and forge some type of agreement that works for both sides to avoid these types of inversions in the future. We all have a vested interest in making America remain the best nation on Earth. We have to work together to make that possible in the future.





Consolidations Abound: Walgreens Strikes Again

In watching the financial news this morning on CNBC and noticed on the stock ticker that Rite Aid was up about 30% which immediately made me curious as to the rationale behind such a big jump. Then, a few minutes later, the news broke that they were in merger talks with pharmacy giant, Walgreens, and it all made sense.


The proposed merger was just formally announced a few minutes ago at the end of the business day here in the Northeast, with Walgreens set to pay $17 billion to obtain Rite Aid. The deal, if confirmed through regulatory channels, would merge two of the top three pharmacy chains in the United States.


Walgreens has been active in recent years with mergers and acquisitions of other regional pharmacy chains, Rite Aid was one of the last major players in the marketplace to essentially complete the major consolidations of the landscape in that industry. The proposed merger would give Walgreens an enhanced presence in the Northeast and Mid-Atlantic regional markets and bolster their competition with market leader CVS.


The other rationale for the merger is to gain leverage with PBMs and other distributors for better pricing on prescription drug products. A combined Walgreens – Rite Aid conglomerate would have a better chance to forge deals with suppliers than if they remained separate entities. This activity comes amidst rising demand for prescription drugs due to the availability of healthcare coverage provided by the Affordable Care Act.


However, the major pharmacy chains such as CVS and Walgreens have been warding off increased competition from club stores and the appealing mail order pharmacy providers which have gained traction in recent years. In a move that received comparatively little mainstream media coverage earlier in 2015, CVS acquired the prescription pharmacy component of Target stores for a little under two billion dollars. The company plans to change over some of the in-store pharmacies to CVS locations within Target floorplans. That represented a big move by CVS to gain a bigger presence in the market and gain penetration into the types of big-box retail stores that have become the main competition for them in recent years.


Walgreens issued a statement today indicating that, at least in the near term, Rite Aid will remain as a brand and that they will not be changing the names of retail locations over to Walgreens. In the future, the Rite Aid name which has stood for decades in the Northeast could disappear. The stock price of Rite Aid did shoot up today in trading by 40% by the end of the day on Wall Street. Conversely, Walgreens was up about 4% at the close of the day.


What does this mean for the consumer? Well, in short, it will mean less competition and less choice in the options for where your family will have their prescriptions filled, it could mean higher prices but ultimately it could provide a better alternative for the consumer if the combined entity is able to leverage distributors into better pricing.


However I always return to the fear of monopolies, whenever too few companies are in control of a commodity as important as prescription drug products, I have to give pause to the consumer. I know that many neighborhood pharmacies today look like retail corner stores with the amount of personal care items they stock, but do not let that fool you, the majority of sales at Walgreens or CVS are still derived from prescription drug products (about 70%).


Consolidations have the downside of eliminating consumer choice from the marketplace, as it did with this proposed transaction. Rite Aid was carrying debt, but it controlled roughly 10% of the prescription pharmaceutical sales in the market and could have lived on without merging with Walgreens. In the end it comes down to the money, and Walgreens made an aggressive bid which provided a roughly 40% premium over the current valuation of the company. If I put it simply: the deal was too good for the shareholders to pass up.


Duke Energy Bets on Natural Gas


The other big merger in the headlines is in the energy industry segment and it involves Charlotte based Duke Energy buying Piedmont in a deal that is massive for Piedmont, and would represent less than 10% of Duke Energy overall. However, the deal reflects the need by Duke to obtain a better position in the natural gas segment of the energy marketplace.


The proposed deal has received some criticism, because if you follow the commodities markets, natural gas is down significantly because of extended periods of mild weather through this Autumn season throughout the USA. Therefore the demand for natural gas is diminished, but it would appear that Duke Energy is banking on a change in that demand curve when the winter months come roaring in.


Most long term forecasters for weather models are split on the amounts of snowfall or major storms we will see this winter but most of them agree that we will not see the record cold temperatures that we did last winter. Duke Energy has a good sense of the marketplace so I am sure that they feel that this investment will yield once the winter gets into full swing.


Natural gas also has a reputation for being cleaner than other energy sources so Duke is most likely going to look to capitalize on that trend as well. It is yet another merger in an increasingly consolidated business landscape.


The next big merger to watch: Bridgestone Tire proposed consolidation of the Pep Boys auto repair chain. In the end I hope that these consolidations will benefit the consumer but I am always reticent when two of the top players in any industry join forces, which is what we had today with Walgreens and Rite Aid; whether or not that benefits the consumer or just limits competition remains to be seen.