Last spring, I found myself at a wedding talking to my cousin about “poison pills.”
Not the Romeo and Juliet kind. The shareholder rights plans – known as “poison pills” – that corporations use to discourage hostile takeovers.
I hadn’t seen this cousin in years. But the first words out of her mouth were literally:
“Adam! You’re an investments guy… have you heard anything about [pharmaceutical company] trying to buy [another pharmaceutical company]!?”
My cousin’s interest in mergers and acquisitions (M&A) rumors had nothing to do with investments. She’s a worrywart… and whispers of a corporate takeover had her anxious about losing her job as a drug rep – hence, her googling of “poison pill” and a slew of other terms that were being tossed around her company’s cafeteria.
Indeed, big pharma’s mega-merger mania has grown to the point where Main Street Americans are talking about it.
As they should be – because the increasingly concentrated control of the health care sector, by a small handful of corporate juggernauts, will no doubt have an impact on both the quality and cost of care.
The latest health care deal to make a splash is Pfizer’s (NYSE: PFE) purchase of Allergan (NYSE: AGN). Announced on Monday, the merger is reportedly worth $160 billion – making it the largest deal in the health care sector’s history.
It’s also the biggest “tax inversion” deal on record.
That’s right… the United States’ largest drug-maker has effectively purchased a Dublin, Ireland postal code – giving it access to tax rates well below the 35% cut Uncle Sam takes from U.S.-domiciled companies.
And get this…
Before Pfizer bought Allergan (cough: for its tax-advantaged postal code)… another U.S-based company, Actavis, had bought Allergan for the same reason in late 2014!
So-called “tax inversion” deals – whereby a U.S. corporation buys a foreign one, aiming to lower its tax bill – have been increasingly popular in recent years. Corporate executives, Pfizer’s included, cite the U.S. corporate tax rate as being an unfair headwind, crippling the competitiveness of U.S. corporations on the global economic stage.
And since lobbyists haven’t had much luck changing the tax code, U.S. corporations are simply moving overseas to gain access to cheaper rates.
While these loop-hole moves are legal, the Treasury Department frowns upon them – understandably – and has been writing tougher rules aimed at blocking more of them.
But the problem I see goes beyond these tax inversion deals. Merger and acquisitions are happening all across the health care sector – at a record pace and in record amounts.
Medical-device maker Medtronic plc (NYSE: MDT) acquired Covidien last year in a deal worth $72 billion.
Earlier this year, UnitedHealth Group (NYSE: UNH) – the largest health insurance provider – bought out pharmacy benefits manager, Catamaran Corporation, for $13 billion.
And the next four largest U.S. health insurance companies may be consolidated into just two, as Anthem (NYSE: ANTM) aims to buy Cigna (NYSE: CI)… and Aetna (NYSE: AET) looks to acquire Humana (NYSE: HUM).
The list goes on…
CVS Health Corp. (NYSE: CSV) agreed to buy 1,600 drugstores from Target (NYSE: TGT) for $1.9 billion in June.
And last month, Walgreens (NYSE: WBA) made an offer to buy pharmacy rival Rite Aid (NYSE: RAD) for $17.2 billion, which, if approved, would combine the country’s second- and third-largest pharmacies.
That’s the rub.
These big pharma mega-mergers are consolidating Corporate America’s control of the health care system.
And the real question is… who benefits from these deals?
Not surprisingly, corporate executives can be caught talking out of both sides of their mouths.
From one side, health care executives say “corporate synergies” will allow them to bring costs down… savings they’ll gladly pass on to the consumer, making everything from doctor’s visits to medications more affordable.
Indeed, America’s health care consumers could use a break, as medical costs have risen much faster than inflation for over a decade.
But from the other side, they’re promising investors better “shareholder value” from the deals – meaning, fatter dividends and rising stock prices.
What’s worrisome – for investors – is that M&A activity may be the last source of shareholder value for a while.
Profit margins look like they’ve peaked…
Cost-cutting measures have been exhausted…
Earnings are on the decline…
And borrowed money will never be cheaper.
That’s why corporate dealmakers are desperately gobbling up smaller competitors, since organic growth is nowhere to be found.
Ultimately, I don’t think the health care sector’s M&A frenzy will be able to benefit both patients and shareholders. After all, the goals of these two groups are at odds – patients want cheaper pricing, investors want fatter profits.
And it’s becoming harder and harder for the sector to achieve either, let alone both, of these goals.
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research
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