Funding, Deals & Partnerships: BIOLOGICS & MEDICAL DEVICES; BioMed e-Series; Medicine and Life Sciences Scientific Journal – http://PharmaceuticalIntelligence.com
Near Term Investment Outlook for 2023: A Perspective from Advisors Potentially Affecting M&A Landscape
Curator: Stephen J. Williams, Ph.D.
The following is an adaptation from various reports and the forseen changes in forecast for different sectors as well as the general investment landscape for the near future (2022-2023). Of course projections may change given changes in undewrlying fundamentals.
Many financial advisors and professionals feel the U.S. is in a late-cycle for its economy, with a significant slowing of corporate earnings in the midst of higher than usual inflation {although inflation estimates are being halved from its current 8-10% for next year}. Consensus investment strategies deemed favorable include US (not international) equities with high quality assest and away from cyclicals. This represents the near end of a business cycle. As growth returns and interest rates increase we may seen the entrance into a new business cycle, although this may not happen until later 2023. In general, it is advised investors move out of cyclicals as the economy continues to slow and into large and mid cap US equities.
This change in landscape may be very favorable to the overall Health Care and Information Technology sectors. In health care, Life Sciences Tools and Services as well as Medical Devices are expected to outperform. In IT, IT Services, software and Networking are favored sectors while communication services like Publishing Services are considered to be Neutral to Unfavorable.
What does this mean for Life Sciences and Health Related small companies looking for an Exit or M&A strategies?
With higher interest rates, credit markets may continue to deteriote and companies may have to look toward Global Macro to find any funding through cash or credit markets. Equity Hedge strategies may be neutral to unfavorable with Event Driven opportunities like distressed deals unfavorable but most analysts do consider Merger Arbitrage as Event Driven strategy to be favorable. A competitive and narrow merger and acquisition environment is expected to last through 2023.
A general consensus for a neutroal environment is seen for most Private Equity, although a more favorable environment for small and mid cap buyouts may exist. Recent short term weakness in the IT sector has led to diminished exit valuations however this may be a good entry point for Growth Equity and Venture Capital. Private Debt strategies look unfavorable due to potential US recessions and potential underwriting issues. Therefore Favored Private Capital strategies include Private Equity for Small and Mid Cap Buyouts and Growth Equity and Venture Capital.
All of the stars are aligned for there to be a flurry of deals activity across all areas of the sector despite the slow start to the year so far. Many large pharma players are flush with cash (particularly those that have COVID-19 treatments in their arsenal), biotech valuations have been normalizing after years of a boom market and the 2025 patent cliff is rapidly approaching, all making for a strong deal environment.
Given the broader labor changes, supply shortages and constantly changing supply chain strategies and operations, the focus on quality can be challenging to sustain. Yet the downside can have massive impacts on businesses, including the potential inability to manufacture products.
The long litany of macroeconomic and regulatory headwinds has CEOs looking for transactions that are easily integrated and will get cash off their balance sheet as inflationary pressures mount.
Pharmaceutical & life sciences deals outlook
Increased scrutiny from the US Federal Trade Commission (FTC) around larger deals could mean that 2022 will be a year of bolt-on transactions in the $5 to $15 billion range as pharma companies take multiple shots on goal in order to make up for revenues lost to generic competition in the remainder of the decade. However, don’t rule out the potential for larger deals — consolidation is good for the health ecosystem and drives broader efficiency.
Expect to see big pharma picking up earlier stage companies to try and fill the pipeline gaps that are likely to start in 2024. While market conditions suggest bargain prices for biotech are possible, recent transactions indicate that pharma companies are still paying significantly above current trading prices (ranging from approximately 50 to 100% of current trading), but below the peak valuations of recent memory.
In the first few months of the year, semi-annualized deal value was down 58% from the same period last year, with companies investing just $61.7 billion so far. Only 137 deals were announced during that time, compared to 204 in the year-prior period.
Talk of drug pricing regulations continues in Washington as Congress bats around a pared down version of the Build Back Better plan. Expect some of that tension to ease in the fall if a new Congress takes on a different agenda.
Other areas of the sector like medical devices face similar headwinds from regulators, and continue to deal with a greater impact from semiconductor shortages. Even though semi-annualized deal value in the medical device space is down 85% from the same period the prior year, expect these companies to remain focused on M&A as the subsector searches for alternative forms of revenue — particularly from new consumer-centric technologies.
Macroeconomic headwinds and geopolitical tensions have created volatility in spending at CDMOs and CROs, limiting their willingness to deploy capital as the uncertainty persists.
No big buyouts were revealed during the annual J.P. Morgan Healthcare Conference for a third year in a row. Big pharma firms are in acquisition mode, but execs stress desire for easy integrations and scientific alliances.
Biopharmaceutical industry players – and reporters – eagerly await merger and acquisition announcements going into the annual J.P. Morgan Healthcare Conference, hoping to scrutinize which big pharma is buying which other company for signs of what the deal-making environment will be like in the coming year. And in 2022, for the third year in a row, the meeting started with no big M&A deals.
They and their peers insisted during J.P. Morgan presentations and Q&A sessions as well as in interviews with Scrip that they do intend to invest in business development in 2022, but with a primary focus on smaller bolt-on acquisitions as well as licensing deals and collaboration agreements. Bolt-on deals have been the focus for the past few years. (Also see “The Pandemic Hurt, But EY Expects More Biopharma Deal-Making In 2021” – Scrip, 11 Jan, 2021.)
Amgen CEO Bradway On Deals: Good (Smaller) Opportunities Are Vast
Amgen is enthusiastic about deals of all sizes, including a new Arrakis collaboration, and is interested in large transactions like its Otezla buy – but Bradway said right-priced opportunities are fewer and farther between.
While investors and others are clamoring for potential buyers to execute large transactions, Amgen CEO Robert Bradway made the astute – and as he pointed out, obvious – observation that there simply are more small, early-stage ventures to partner with than there are large, later-stage companies to acquire. Bradway also noted that while Amgen would like to buy another growing commercial-stage product like Otezla (apremilast), not only are few available but there are few assets at a price that still leaves value on the table for both companies’ investors.
The following podcast from Pricewaterhouse Cooper Health Research Institute (called Next in Health) discusses some of the trends in healthcare M&A and is a great listen. However from 6:30 on the podcast discusses a new trend which is occuring in the healthcare company boardroom, which is this new focus on integrating companies that have proven ESG (or environmental, social, governance) functions within their organzations. As stated, doing an M&A deal with a company with strong ESG is looked favorably among regulators now.
Please click on the following link to hear a Google Podcast Next in Health episode
AI Acquisitions by Big Tech Firms Are Happening at a Blistering Pace: 2019 Recent Data by CBI Insights
Reporter: Stephen J. Williams, Ph.D.
3.4.16 AI Acquisitions by Big Tech Firms Are Happening at a Blistering Pace: 2019 Recent Data by CBI Insights, Volume 2 (Volume Two: Latest in Genomics Methodologies for Therapeutics: Gene Editing, NGS and BioInformatics, Simulations and the Genome Ontology), Part 3: AI in Medicine
Recent report from CBI Insights shows the rapid pace at which the biggest tech firms (Google, Apple, Microsoft, Facebook, and Amazon) are acquiring artificial intelligence (AI) startups, potentially confounding the AI talent shortage that exists.
The usual suspects are leading the race for AI: tech giants like Facebook, Amazon, Microsoft, Google, & Apple (FAMGA) have all been aggressively acquiring AI startups in the last decade.
Among the FAMGA companies, Apple leads the way, making 20 total AI acquisitions since 2010. It is followed by Google (the frontrunner from 2012 to 2016) with 14 acquisitions and Microsoft with 10.
Apple’s AI acquisition spree, which has helped it overtake Google in recent years, was essential to the development of new iPhone features. For example, FaceID, the technology that allows users to unlock their iPhone X just by looking at it, stems from Apple’s M&A moves in chips and computer vision, including the acquisition of AI company RealFace.
In fact, many of FAMGA’s prominent products and services came out of acquisitions of AI companies — such as Apple’s Siri, or Google’s contributions to healthcare through DeepMind.
That said, tech giants are far from the only companies snatching up AI startups.
Since 2010, there have been 635 AI acquisitions, as companies aim to build out their AI capabilities and capture sought-after talent (as of 8/31/2019).
The pace of these acquisitions has also been increasing. AI acquisitions saw a more than 6x uptick from 2013 to 2018, including last year’s record of 166 AI acquisitions — up 38% year-over-year.
In 2019, there have already been 140+ acquisitions (as of August), putting the year on track to beat the 2018 record at the current run rate.
Part of this increase in the pace of AI acquisitions can be attributed to a growing diversity in acquirers. Where once AI was the exclusive territory of major tech companies, today, smaller AI startups are becoming acquisition targets for traditional insurance, retail, and healthcare incumbents.
For example, in February 2018, Roche Holding acquired New York-based cancer startup Flatiron Health for $1.9B — one of the largest M&A deals in artificial intelligence.This year, Nike acquired AI-powered inventory management startup Celect, Uber acquired computer vision company Mighty AI, and McDonald’s acquired personalization platform Dynamic Yield.
Despite the increased number of acquirers, however, tech giants are still leading the charge. Acquisitive tech giants have emerged as powerful global corporations with a competitive advantage in artificial intelligence, and startups have played a pivotal role in helping these companies scale their AI initiatives.
Apple, Google, Microsoft, Facebook, Intel, and Amazon are the most active acquirers of AI startups, each acquiring 7+companies.
To read more on recent Acquisitions in the AI space please see the following articles on this Open Access Online Journal
Three years after purchasing Medivation for $14.3 billion, Pfizer is back with another hefty M&A deal. And once again, it’s betting on oncology.
In the first big M&A deal under new CEO Albert Bourla, Pfizer has agreed to buy oncology specialist Array BioPharma for a total value of about $11.4 billion, the two companies unveiled Monday. The $48-per-share offer represents a premium of about 62% to Array stock’s closing price on Friday.
With the acquisition, Pfizer will beef up its oncology offerings with two marketed drugs, MEK inhibitor Mektovi and BRAF inhibitor Braftovi, which are approved as a combo treatment for melanoma and recently turned up positive results in colon cancer.
The buy will enhance the Pfizer innovative drug business’ “long-term growth trajectory,” Bourla said in a Monday statement, dubbing Mektovi-Braftovi “a potentially industry-leading franchise for colorectal cancer.”
In a recent interim analysis of a trial in BRAF-mutant metastatic colorectal cancer, the pair, used in tandem with Eli Lilly and Merck KGaA’s Erbitux, produced a benefit in 26% of patients, versus the 2% that chemotherapy helped. The combo also showed it could reduce the risk of death by 48%. SVB Leerink analysts at that time called the data “extremely compelling.”
Right now, one in every three new patients with mutated metastatic melanoma is getting the combo, despite its third-to-market behind combos from Roche and Novartis, Andy Schmeltz, Pfizer’s oncology global president, said during an investor briefing on Monday.
It is being studied in more than 30 clinical studies across several solid tumor indications. Moving forward, Pfizer believes the combo could potentially be used in the adjuvant setting to prevent tumor recurrence after surgery, Pfizer’s chief scientific officer, Mikael Dolsten, said on the call. The company is also keen to know how it could be paired up with Pfizer’s own investigational PD-1, he said, as the combo is already in studies with other PD-1/L1s.
But as Pfizer execs have previously said, the company’s current business development strategy no longer centers on adding revenues “now or soon,” but rather on strengthening Pfizer’s pipeline with earlier-stage assets. And Array can help there, too.
“We are very excited by Array’s impressive track record of successfully discovering and developing innovative small-molecules and targeted cancer therapies,” Dolsten said in a statement.
On top of Mektovi and Braftovi, Array has a long list of out-licensed drugs that could generate big royalties over time. For example, Vitrakvi, the first drug to get an initial FDA approval in tumors with a particular molecular feature regardless of their location, was initially licensed to Loxo Oncology—which was itself snapped up by Eli Lilly for $8 billion—but was taken over by pipeline-hungry Bayer. There are other drugs licensed to the likes of AstraZeneca, Roche, Celgene, Ono Pharmaceutical and Seattle Genetics, among others.
Those drugs are also a manifestation of Array’s strong research capabilities. To keep those Array scientists doing what they do best, Pfizer is keeping a 100-person team in Colorado as a standalone research unit alongside Pfizer’s existing hubs, Schmeltz said.
Pfizer is counting on Array to augment its leadership in breast cancer, an area championed by Ibrance, and prostate cancer, the pharma giant markets Astellas-partnered Xtandi. For 2018, revenues from the Pfizer oncology portfolio jumped to $7.20 billion—up from $6.06 billion in 2017—mainly thanks to those two drugs.
Array markets BRAFTOVI® (encorafenib) capsules in combination with MEKTOVI® (binimetinib) tablets for the treatment of patients with unresectable or metastatic melanoma with a BRAFV600E or BRAFV600K mutation in the United States and with partners in other major worldwide markets.* Array’s lead clinical programs, encorafenib and binimetinib, are being investigated in over 30 clinical trials across a number of solid tumor indications, including a Phase 3 trial in BRAF-mutant metastatic colorectal cancer. Array’s pipeline includes several additional programs being advanced by Array or current license-holders, including the following programs currently in registration trials: selumetinib (partnered with AstraZeneca), LOXO-292 (partnered with Eli Lilly), ipatasertib (partnered with Genentech), tucatinib (partnered with Seattle Genetics) and ARRY-797. Vitrakvi® (larotrectinib, partnered with Bayer AG) is approved in the United States and Ganovo® (danoprevir, partnered with Roche) is approved in China.
Other Articles of Note of Pfizer Merger and Acquisition deals on this Open Access Journal Include:
From Thalidomide to Revlimid: Celgene to Bristol Myers to possibly Pfizer; A Curation of Deals, Discovery and the State of Pharma
Curator: Stephen J. Williams, Ph.D.
Updated 6/24/2019
Updated 4/12/2019
Updated 2/28/2019
Lenalidomide (brand name Revlimid) is an approved chemotherapeutic used to treat multiple myeloma, mantle cell lymphoma, and certain myedysplastic syndromes. It is chemically related to thalidomide analog with potential antineoplastic activity. Lenalidomide inhibits TNF-alpha production, stimulates T cells, reduces serum levels of the cytokines vascular endothelial growth factor (VEGF) and basic fibroblast growth factor (bFGF), and inhibits angiogenesis. This agent also promotes G1 cell cycle arrest and apoptosis of malignant cells. It is usually given with dexamethasone for multiple myeloma. Revlimid was developed and sold by Celgene Corp. However, recent news of deals with Bristol Myers Squib
Revlimid (lenalidomide) is an immunomodulatory drug indicated for the treatment of patients with multiple myeloma, transfusion-dependent anemia due myelodysplastic syndromes (MDS), and mantle cell lymphoma.
Development History and FDA Approval Process for Revlimid
Right before the 2019 JP Morgan Healthcare Conference and a month before Bristol Myers quarterly earings reports, Bristol Myers Squib (BMY) announes a $74 Billion offer for Celgene Corp. From the Bristol Myers website press realease:
Highly Complementary Portfolios with Leading Franchises in Oncology, Immunology and Inflammation and Cardiovascular Disease
Significantly Expands Phase III Assets with Six Expected Near-Term Product Launches, Representing Greater Than $15 Billion in Revenue Potential
Registrational Trial Opportunities and Early-Stage Pipeline Position Combined Company for Sustained Leadership Underpinned by Cutting-Edge Technologies and Discovery Platforms
Strong Combined Cash Flows, Enhanced Margins and EPS Accretion of Greater Than 40% in First Full Year
Approximately $2.5 Billion of Expected Run-Rate Cost Synergies to Be Achieved by 2022
THURSDAY, JANUARY 3, 2019 6:58 AM EST
NEW YORK & SUMMIT, N.J.,–(BUSINESS WIRE)–Bristol-Myers Squibb Company (NYSE:BMY) and Celgene Corporation (NASDAQ:CELG) today announced that they have entered into a definitive merger agreement under which Bristol-Myers Squibb will acquire Celgene in a cash and stock transaction with an equity value of approximately $74 billion. Under the terms of the agreement, Celgene shareholders will receive 1.0 Bristol-Myers Squibb share and $50.00 in cash for each share of Celgene. Celgene shareholders will also receive one tradeable Contingent Value Right (CVR) for each share of Celgene, which will entitle the holder to receive a payment for the achievement of future regulatory milestones. The Boards of Directors of both companies have approved the combination.
The transaction will create a leading focused specialty biopharma company well positioned to address the needs of patients with cancer, inflammatory and immunologic disease and cardiovascular disease through high-value innovative medicines and leading scientific capabilities. With complementary areas of focus, the combined company will operate with global reach and scale, maintaining the speed and agility that is core to each company’s strategic approach.
Based on the closing price of Bristol-Myers Squibb stock of $52.43 on January 2, 2019, the cash and stock consideration to be received by Celgene shareholders at closing is valued at $102.43 per Celgene share and one CVR (as described below). When completed, Bristol-Myers Squibb shareholders are expected to own approximately 69 percent of the company, and Celgene shareholders are expected to own approximately 31 percent.
“Together with Celgene, we are creating an innovative biopharma leader, with leading franchises and a deep and broad pipeline that will drive sustainable growth and deliver new options for patients across a range of serious diseases,” said Giovanni Caforio, M.D., Chairman and Chief Executive Officer of Bristol-Myers Squibb. “As a combined entity, we will enhance our leadership positions across our portfolio, including in cancer and immunology and inflammation. We will also benefit from an expanded early- and late-stage pipeline that includes six expected near-term product launches. Together, our pipeline holds significant promise for patients, allowing us to accelerate new options through a broader range of cutting-edge technologies and discovery platforms.”
Dr. Caforio continued, “We are impressed by what Celgene has accomplished for patients, and we look forward to welcoming Celgene employees to Bristol-Myers Squibb. Our new company will continue the strong patient focus that is core to both companies’ missions, creating a shared organization with a goal of discovering, developing and delivering innovative medicines for patients with serious diseases. We are confident we will drive value for shareholders and create opportunities for employees.”
“For more than 30 years, Celgene’s commitment to leading innovation has allowed us to deliver life-changing treatments to patients in areas of high unmet need. Combining with Bristol-Myers Squibb, we are delivering immediate and substantial value to Celgene shareholders and providing them meaningful participation in the long-term growth opportunities created by the combined company,” said Mark Alles, Chairman and Chief Executive Officer of Celgene. “Our employees should be incredibly proud of what we have accomplished together and excited for the opportunities ahead of us as we join with Bristol-Myers Squibb, where we can further advance our mission for patients. We look forward to working with the Bristol-Myers Squibb team as we bring our two companies together.”
Compelling Strategic Benefits
Leading franchises with complementary product portfolios provide enhanced scale and balance. The combination creates:
Leading oncology franchises in both solid tumors and hematologic malignancies led by Opdivo and Yervoy as well as Revlimid and Pomalyst;
A top five immunology and inflammation franchise led by Orencia and Otezla; and
The #1 cardiovascular franchise led by Eliquis.
The combined company will have nine products with more than $1 billion in annual sales and significant potential for growth in the core disease areas of oncology, immunology and inflammation and cardiovascular disease.
Near-term launch opportunities representing greater than $15 billion in revenue potential. The combined company will have six expected near-term product launches:
Two in immunology and inflammation, TYK2 and ozanimod; and
Four in hematology, luspatercept, liso-cel (JCAR017), bb2121 and fedratinib.
These launches leverage the combined commercial capabilities of the two companies and will broaden and enhance Bristol-Myers Squibb’s market position with innovative and differentiated products. This is in addition to a significant number of lifecycle management registrational readouts expected in Immuno-Oncology (IO).
Early-stage pipeline builds sustainable platform for growth. The combined company will have a deep and diverse early-stage pipeline across solid tumors and hematologic malignancies, immunology and inflammation, cardiovascular disease and fibrotic disease leveraging combined strengths in innovation. The early-stage pipeline includes 50 high potential assets, many with important data readouts in the near-term. With a significantly enhanced early-stage pipeline, Bristol-Myers Squibb will be well positioned for long-term growth and significant value creation.
Powerful combined discovery capabilities with world-class expertise in a broad range of modalities. Together, the Company will have expanded innovation capabilities in small molecule design, biologics/synthetic biologics, protein homeostasis, antibody engineering and cell therapy. Furthermore, strong external partnerships provide access to additional modalities.
Compelling Financial Benefits
Strong returns and significant immediate EPS accretion. The transaction’s internal rate of return is expected to be well in excess of Celgene’s and Bristol-Myers Squibb’s cost of capital. The combination is expected to be more than 40 percent accretive to Bristol-Myers Squibb’s EPS on a standalone basis in the first full year following close of the transaction.
Strong balance sheet and cash flow generation to enable significant investment in innovation. With more than $45 billion of expected free cash flow generation over the first three full years post-closing, the Company is committed to maintaining strong investment grade credit ratings while continuing its dividend policy for the benefit of Bristol-Myers Squibb and Celgene shareholders. Bristol-Myers Squibb will also have significant financial flexibility to realize the full potential of the enhanced late- and early-stage pipeline.
Meaningful cost synergies. Bristol-Myers Squibb expects to realize run-rate cost synergies of approximately $2.5 billion by 2022. Bristol-Myers Squibb is confident it will achieve efficiencies across the organization while maintaining a strong, core commitment to innovation and delivering the value of the portfolio.
Terms and Financing
Based on the closing price of Bristol-Myers Squibb stock on January 2, 2019, the cash and stock consideration to be received by Celgene shareholders is valued at $102.43 per share. The cash and stock consideration represents an approximately 51 percent premium to Celgene shareholders based on the 30-day volume weighted average closing stock price of Celgene prior to signing and an approximately 54 percent premium to Celgene shareholders based on the closing stock price of Celgene on January 2, 2019. Each share also will receive one tradeable CVR, which will entitle its holder to receive a one-time potential payment of $9.00 in cash upon FDA approval of all three of ozanimod (by December 31, 2020), liso-cel (JCAR017) (by December 31, 2020) and bb2121 (by March 31, 2021), in each case for a specified indication.
The transaction is not subject to a financing condition. The cash portion will be funded through a combination of cash on hand and debt financing. Bristol-Myers Squibb has obtained fully committed debt financing from Morgan Stanley Senior Funding, Inc. and MUFG Bank, Ltd. Following the close of the transaction, Bristol-Myers Squibb expects that substantially all of the debt of the combined company will be pari passu.
Accelerated Share Repurchase Program
Bristol-Myers Squibb expects to execute an accelerated share repurchase program of up to approximately $5 billion, subject to the closing of the transaction, market conditions and Board approval.
Corporate Governance
Following the close of the transaction, Dr. Caforio will continue to serve as Chairman of the Board and Chief Executive Officer of the company. Two members from Celgene’s Board will be added to the Board of Directors of Bristol-Myers Squibb. The combined company will continue to have a strong presence throughout New Jersey.
Approvals and Timing to Close
The transaction is subject to approval by Bristol-Myers Squibb and Celgene shareholders and the satisfaction of customary closing conditions and regulatory approvals. Bristol-Myers Squibb and Celgene expect to complete the transaction in the third quarter of 2019.
Advisors
Morgan Stanley & Co. LLC is serving as lead financial advisor to Bristol-Myers Squibb, and Evercore and Dyal Co. LLC are serving as financial advisors to Bristol-Myers Squibb. Kirkland & Ellis LLP is serving as Bristol-Myers Squibb’s legal counsel. J.P. Morgan Securities LLC is serving as lead financial advisor and Citi is acting as financial advisor to Celgene. Wachtell, Lipton, Rosen & Katz is serving as legal counsel to Celgene.
Bristol-Myers Squibb 2019 EPS Guidance
In a separate press release issued today, Bristol-Myers Squibb announced its 2019 EPS guidance for full-year 2019, which is available on the “Investor Relations” section of the Bristol-Myers Squibb website at https://www.bms.com/investors.html.
Conference Call
Bristol-Myers Squibb and Celgene will host a conference call today, at 8:00 a.m. ET to discuss the transaction. The conference call can be accessed by dialing (800) 347-6311 (U.S. / Canada) or (786) 460-7199 (International) and giving the passcode 4935567. A replay of the call will be available from January 3, 2019 until January 17, 2019 by dialing (888) 203-1112 (U.S. / Canada) or (719) 457-0820 (International) and giving the passcode 4935567.
2. Then through news on Bloomberg and some other financial sites on a possible interest of a merged Celgene-Bristol Myers from Pfizer as well as other pharma groups
Billionaire John Paulson sees a 10 percent to 20 percent chance that Bristol-Myers Squibb Co. receives a takeover bid and he’s positioning his Celgene Corp. trade based on that risk, he said in an interview on Mike Samuels’ “According to Sources” podcast.
Bristol-Myers “is vulnerable and it has an attractive pipeline to several potential acquirers,” Paulson said in the podcast released Monday. “It’s a reasonable probability,” he said. “You have to be prepared someone may show up. It’s an attractive spread, but you can’t take that big a position.”
John Paulson
Photographer: Jin Lee/Bloomberg
Paulson has the Celgene/Bristol-Myers trade as a 3 percent portfolio position, though his firm is short a pharma index rather than Bristol-Myers for about half of the position. If an activist did show up, it would likely blow out the spread from its current $13.85 to probably $20 and, if an actual bid arrived, he said the spread could move out to $40.
“I just don’t feel comfortable being short Bristol in this environment,” Paulson said. “You can sort of get the same economics by shorting an index, maybe even do better because, since Bristol came down, if the pharma sector goes up, Bristol may go up more than the pharma sector, which would increase the profitability on the Celgene. ”
Celgene fell as much as 2.2 percent on Tuesday, its biggest intraday drop since Dec. 27. Bristol-Myers also sank as much as 2.2 percent, the most since Jan. 9.
The question of whether Bristol-Myers receives a hostile takeover offerhas been the top issue for investors since the Celgene deal was announced. The drugmaker was pressured in February 2017 to add three new directors after holding talks with activist hedge fund Jana Partners LLC. The same month, the Wall Street Journal reported that Carl Icahn had taken a stake and saw Bristol-Myers as a takeover target.
Pfizer Inc., AbbVie Inc. or Amgen Inc. “make varying amounts of sense as suitors, though we see many barriers to someone making an offer,” Credit Suisse analyst Vamil Divan wrote in a note earlier this month. AbbVie and Amgen “have the balance sheet strength and could look to beef up their oncology presence.”
CNBC’s David Faber said Jan. 3 — the day the Celgene deal was announced — that there had been “absolutely” no talks between Bristol-Myers and potential acquirers.
Jefferies analyst Michael Yee wrote in note Tuesday that he doesn’t expect an unsolicited offer for Bristol-Myers to “thwart” its Celgene purchase. He sees the deal spread as “quite attractive” again at the current range of 18 percent to 20 percent after it had earlier narrowed to 11 percent to 12 percent.
Paulson managed about $8.7 billion at the the beginning of November.
Nina Kjellson was just two years out of college, working as a research associate at Oracle Partners, a hedge fund in New York, when a cabbie gave her a stock tip. There was a company in New Jersey, he told her, trying to resurrect thalidomide, a drug that was infamous for causing severe birth defects, as a treatment for cancer.
Kjellson was born in Finland, where the memory of thalidomide, which was given to mothers to treat morning sickness but led to babies born without arms or legs, was particularly raw because the drug hit Northern Europe hard. But she was on the hunt for new cancer drugs, and her interest was piqued. She ended up investing a small amount of her own money in Celgene. That was 1999.
Since then, Celgene shares have risen more than 100-fold; the company became one of the largest biotechnology firms in the world. Earlier this month, rival Bristol-Myers Squibb announced plans to purchase Celgene for $74 billion in cash and stock.
Reflecting on a company she watched for two decades, Kjellson, now a venture capitalist at Canaan Partners in San Francisco, marveled at the “grit and chutzpah” that it took to push thalidomide back onto the market. “The company started taking off,” she remembered, “but not without an incredible reversal.” Celgene faced resistance from some thalidomide victims, and the Food and Drug Administration was lobbied not to revive the drug. In the end, she said, it built a golden egg and became a favorite partner of smaller biotech companies like the ones she funds. And it populated the rest of the pharmaceutical industry with its alumni. “If I had a nickel for every company that says we want to do Celgene-like deals,” she said, “I’d have better returns than from my venture career.”
But there’s another side to Celgene. When the company launched thalidomide as a treatment for leprosy in 1998, it cost $6 a pill. As it became clear that it was also an effective cancer drug, Celgene slowly raised the price, quadrupling it by the time it received approval for an improved molecule, Revlimid. Then, it slowly increased the price of Revlimid by a total of 145 percent, according to Sector & Sovereign LLC, a pharmaceutical consultancy.
Revlimid now costs $693 a pill. In 2017, Revlimid and another thalidomide-derived cancer drug represented 76 percent of Celgene’s $12.9 billion in annual sales. Kjellson gives the company credit for guts in science, for taking a terrible drug and resurrecting it. But it also had chutzpah when it came to what it charged.
A pioneer in ‘modern pricing’
How did the price of thalidomide, and then Revlimid, increase so much? Celgene explained it in a 2004 front-page story in the Wall Street Journal. “When we launched it, it was going to be an AIDS-wasting drug,” Celgene’s chief executive at the time, John Jackson, said. “We couldn’t charge more or there would have been demonstrations outside the company.” But once Celgene realized that the drug was a cancer treatment, the company decided to slowly bring thalidomide’s price more in line with other cancer medicines, such as Velcade, a rival medicine now sold by the Japanese drug giant Takeda. In 2003, it cost more than twice as much as thalidomide. “By bringing [the price] up every year, it was heading toward where it should be as a cancer drug,” Jackson told the Journal.
Thalidomide was not actually approved as a myeloma treatment until 2006. That same year, Revlimid, which causes less sleepiness and nerve pain than thalidomide, was approved, and Barer, the chemist behind Celgene’s thalidomide strategy, took over as chief executive. He made good on thalidomide’s promise, churning out one blockbuster after another. In 2017 Revlimid generated $8.2 billion. Another cancer drug derived from thalidomide, Pomalyst, generated $1.6 billion. Otezla, a very different drug also based on thalidomide’s chemistry, treats psoriasis and psoriatic arthritis. Its 2017 sales: $1.3 billion.
With persistent price increases, quarter after quarter, Celgene pioneered something else: what Wall Street calls “modern pricing.” Cancer drug prices have risen inexorably.
Activist investor Starboard Value is officially rallying the troops against Bristol-Myers Squibb’s $74 billion Celgene deal, and thanks to a big investor’s thumbs-down, it’ll have more support than some expected. But the question is whether it’ll be enough to scuttle the merger.
Starboard CEO Jeffrey Smith penned a letter (PDF) to Bristol-Myers’ shareholders on Thursday labeling the transaction “poorly conceived and ill-advised.” It intends to vote its shares—which number 1.63 million, though the hedge fund is seeking more—against the deal, and it wants to see other shareholders do the same. It’ll be filing proxy materials “in the coming days” to solicit “no” votes from BMS investors, Smith said.
Starboard picked up its stake early this year after the deal was announced, BMS confirmed last week, but until now, the activist fund hasn’t been forthcoming about its intentions. But the timing of its reveal is likely no coincidence; just Wednesday, Wellington Management—which owns about 8% of Bristol-Myers’ shares and ranked as its largest institutional shareholder as of earlier this week—came out publicly against the “risky” buyout.
But while “we believe it is possible at least one other long-term top-five [shareholder] may disagree with the transaction, too,” RBC Capital Markets’ Michael Yee wrote in his own investor note, he—as many of his fellow analysts do—still expects to see the deal go through. “We think the vast majority of the acquirer holder base that would not like the deal already voted by selling their shares earlier, leaving investors who are mostly supportive of the deal,” he wrote.
Meanwhile, Starboard has been clear about one other thing: It wants board seats. It’s nominated five new directors, including CEO Smith, and investors will vote on that group at an as-yet-unscheduled meeting. Thing is, that meeting will take place after BMS investors vote on the Celgene deal in April, so Starboard will have to rally sufficient support against the deal if it wants to see them installed.
The “probability of a third-party buyer for Bristol-Myers Squibb” before the April vote is “very low,” BMO Capital Markets analysts wrote recently, adding that “we do not believe a potential activist can change that.” Barclays analysts agreed Wednesday, pointing to a “lack of realistic, potential alternatives that could collectively provide a similar level of upside.”
Three quarters of Bristol-Myers Squibb shareholders vote to approve the deal with Celgene, paving the way for the largest pharmaceutical takeover in history.
Bristol-Myers Squibb (BMY – Get Report) on Friday announced that it had secured enough shareholder votes to approve its roughly $74 billion takeover of Celgene (CELG – Get Report) , putting the company closer to finalizing the largest pharmaceutical merger in history.
More than 75% of Bristol-Myers shareholders voted to approve the deal, according to a preliminary tally announced by Bristol-Myers on Friday.
Bristol-Myers’ position took a positive turn in late March after an influential shareholder advisory group recommended investors vote in favor of the cancer drug specialist’s takeover, and a key activist dropped its opposition to the deal.
Institutional Shareholder Services recommended the deal, which had been challenged by key Bristol-Myers shareholders Starboard Value and Wellington Management, ahead of Friday’s vote.
Updated 6/24/2019
Bristol Myers agrees to sell off Celgene blockbuster psoriasis and arthritis drug Otezla to satisfy FTC in hopes to speed up merger
Bristol-Myers Squibb hasn’t exactly had a pristine path to its proposed acquisition of Celgene. Sure, the legacy pharma giant racked up more than 75% of shareholder votes to approve the $74 billion acquisition following a quickly-quashed rebellion from some activist naysayers. But the company hit another hurdle in its Celgene acquisition quest that sent Bristol Myers stock tumbling nearly 7.5%, a $6 billion erasure in market value.
The reason(s)? For one, Bristol-Myers Squibb reported an unfortunate clinical trial result from a late-stage study of its cancer immunotherapy superstar Opdivo in liver cancer. For another—BMS made a somewhat surprising announcement that it would spin off Celgene’s blockbuster psoriasis and arthritis drug Otezla, slated to rake in nearly $2 billion in sales this year alone, in order to address Federal Trade Commission (FTC) antitrust concerns over the M&A.
That means the Bristol-Myers Celgene deal may not close until early 2020, rather than the originally expected timeline by the end of this year.
“Bristol-Myers Squibb reaffirms the significant value creation opportunity of the acquisition of Celgene,” the firm said in a statement. “Together with $2.5 billion of cost synergies, a compelling pipeline and a strong portfolio of marketed products, the company continues to expect growth in sales and earnings through 2025.”
Investors can be a fickle bunch. For now, though, they don’t seem particularly pleased at the decision to lop off one of Celgene’s tried and true cash cows.
Additional posts on Pharma Mergers and Deals on this Open Access Journal include:
37th Annual J.P. Morgan HEALTHCARE CONFERENCE: #JPM2019 for Jan. 8, 2019; Opening Videos, Novartis expands Cell Therapies, January 7 – 10, 2019, Westin St. Francis Hotel | San Francisco, California, Volume 2 (Volume Two: Latest in Genomics Methodologies for Therapeutics: Gene Editing, NGS and BioInformatics, Simulations and the Genome Ontology), Part 1: Next Generation Sequencing (NGS)
37th Annual J.P. Morgan HEALTHCARE CONFERENCE: #JPM2019 for Jan. 8, 2019; Opening Videos, Novartis expands Cell Therapies, January 7 – 10, 2019, Westin St. Francis Hotel | San Francisco, California
Reporter: Stephen J. Williams, PhD
The annual J.P. Morgan Healthcare Conference is the largest and most informative healthcare investment symposium in the industry, bringing together industry leaders, emerging fast-growth companies, innovative technology creators, and members of the investment community.
Joe Biden on the Fight Against Cancer
Former Vice President of the United States joined the J.P. Morgan Healthcare Conference to discuss cancer initiatives.
Novartis Talks Move to Cell and Gene Therapies at JPM
Published: Jan 08, 2019By Alex Keown from Biospace.com
Denis Linine / Shutterstock
Following a strong post-hoc analysis of mid-stage data in the fall of 2018, Novartis announced this morning the company’s experimental humanized anti-P-selectin monoclonal antibody was crizanlizumab granted Breakthrough Therapy Status by the U.S.Food and Drug Administration (FDA).
Crizanlizumab received the designation as a treatment for the prevention of vaso-occlusive crises (VOCs) in patients of all genotypes with sickle cell disease (SCD). VOCs, which can be extremely painful for patients, happen when multiple blood cells stick to each other and to blood vessels, causing blockages.
The designation was awarded following results from the Phase II SUSTAIN trial, which showed that crizanlizumab reduced the median annual rate of VOCs leading to health care visits by 45.3 percent compared to placebo. The SUSTAIN study also showed that crizanlizumab significantly increased the percentage of patients who did not experience any VOCs vs placebo, 35.8 percent vs. 16.9 percent.
The FDA designation came one day after the Swiss pharma giant laid out its map for a future of success, sustainability and, if things work out, respect from consumers. In an interview with CNBC Monday, Novartis Chief Executive Officer Vas Narasimhan noted that the company is looking to become an entity that doesn’t draw its profits from treating disease, but will make money by providing cures. He pointed to the moves Novartis has made toward gene and cellular therapies that have the potential to cure patients of various diseases in what many researchers hope could be a “one-and-done” treatment. Narasimhan told CNBC that cures are what society wants and that is something they will value. The challenge will be determining the payment system.
As an example, the company is eying potential approval of a gene therapy for spinal muscular atrophy (SMA), a fatal genetic disease marked by progressive, debilitating muscle weakness in infants and toddlers. Novartis’ gene therapy Zolgensma is expected to be approved by the FDA this year and could have a price tag of between $4 and $5 million. While significantly high, non-profit SMA groups have already suggested that the gene therapy treatment could be more cost-effective than Spinraza, the only approved SMA treatment on the market.
During its presentation at J.P. Morgan, Novartis pointed to the moves it has made as the company pivots to this future of gene and cell therapies. The presentation noted that over the course of 2018, the company made several deals to sell off non-essential businesses, such as the $13 billion sale of its share of a consumer health business to partner GlaxoSmithKline. Not only that, but Novartis also made significant acquisitions to reshape its portfolio, including the $8.7 billion acquisition of AveXis for the SMA gene therapy. The deal for AveXis wasn’t the only gene therapy deal the company struck. Novartis began 2018 with a deal for Spark Therapeutics’ gene therapy Luxturna, a one-time gene therapy to restore functional vision in children and adult patients with biallelic mutations of the RPE65 (retinal pigment epithelial 65 kDa protein) gene.
In his interview with CNBC, Narasimhan said the company is about “platforms,” which also includes radio-ligand therapy. The company forged ahead in that area with two acquisitions, Advanced Accelerator Applications and Endocyte. Radiopharmaceuticals like Endocyte’s Lu-PSMA-617 are innovative medicinal formulations containing radioisotopes used clinically for both diagnosis and therapy. When the Endocyte deal was announced, Novartis noted the field is expected to become an increasingly important treatment option for patients, as well as a key growth driver for the company’s oncology business.
Other posts on the JP Morgan 2019 Healthcare Conference on this Open Access Journal include:
Now, as Bloomberg reports the international deal between Allergan and Pfizer has gone through, resulting in a tax inversion and nary a discouraging word from the US Federal Government (their blessing for future tax inversions?). And as Bloomberg Go guest speculate finally it may spark Congress to do something about it, or perhaps not. For details see Bloomberg transcript below:
Pfizer Inc. and Allergan Plc agreed to combine in a record $160 billion deal, creating a drugmaking behemoth called Pfizer Plc with products from Viagra to Botox and a low-cost tax base.
Pfizer will exchange 11.3 shares for each Allergan share, valuing the smaller drugmaker at $363.63 a share, according to a statement Monday. That’s a premium of about 27 percent above Allergan’s stock price on Oct. 28, before news of the companies’ discussions became public. Pfizer investors will be able to opt for cash instead of stock in the combined company in exchange for their shares, with as much as $12 billion to be paid out.
The transaction is structured so that Dublin-based Allergan is technically buying its much larger partner, a move that makes it easier for the company to locate its tax address in Ireland for tax purposes, though the drugmaker’s operational headquarters will be in New York. Pfizer Chief Executive Officer Ian Read will be chairman and CEO of the new company, with Allergan CEO Brent Saunders as president and chief operating officer, overseeing sales, manufacturing and strategy.
The deal will begin adding to Pfizer’s adjusted earnings starting in 2018 and will boost profit by 10 percent the following year, the companies said. Pfizer’s 11 board members will join four from Allergan, including Saunders and Executive Chairman Paul Bisaro.Pfizer dropped 2.1 percent to $31.51 at 9:34 a.m. in New York, while Allergan fell 2 percent to $306.17. The combined company will trade on the New York Stock Exchange.Pfizer said it will start a $5 billion accelerated share buyback program in the first half of 2016. The deal is expected to be completed by the end of next year.
Unprecedented Deal
Pfizer, based in New York, makes medications including Viagra, pain drug Lyrica and the Prevnar pneumococcal vaccine, and Allergan produces Botox and the Alzheimer’s drug Namenda. Together, barring any divestitures, the companies will be the biggest pharmaceutical company by annual sales, with about $60 billion. The deal will be unprecedented on many levels. It’s the largest acquisition so far this year. It’s the largest ever in the pharmaceutical world, eclipsing Pfizer’s purchase of Warner-Lambert Co. in 2000 for $116 billion. And if the new company is able to establish itself abroad for a lower tax rate, a controversial process called an inversion, it will be the largest such move in history. The U.S. Treasury Department has increasingly targeted such strategies, most recently announcing new guidance on how it will value assets owned by U.S. companies that undertake inversions. The U.S. has the highest tax rate for businesses in the world, at 35 percent, and is one of the only countries to tax corporate profits wherever they are earned. Previous moves by the U.S. Treasury have derailed other proposed inversions, including AbbVie Inc.’s plan to buy Ireland’s Shire Plc for an estimated $52 billion. Pfizer and Allergan’s deal appears structured to avoid the tax inversion rules.
Read has already reached out to lawmakers in both houses of Congress, including Senate Majority Leader Mitch McConnell, and is calling the White House Monday, according to a person with knowledge of the matter. His pitch is that that the deal will help the companies invest in more innovative drugs and that Pfizer Plc would have 40,000 U.S. employees at the close of the transaction.
Facilitate Split
An agreement may also facilitate the widely discussed potential for Pfizer to reconfigure itself by splitting the newly enlarged company into two: one focused on new drug development, the other on selling older medications. Pfizer said Monday it will decide on a potential separation by the end of 2018. Pfizer earlier this year bought Hospira Inc., the maker of generic drugs often administered in hospitals, in a transaction valued at about $17 billion. The deal bolstered Pfizer’s established-drugs business, which combines strong cash flow and slow growth. Allergan itself has been recently transformed, created through an acquisition by Actavis Plc that kept the Allergan name. The company agreed to sell its generics business to Israel’s Teva Pharmaceutical Industries Ltd. for about $40.5 billion and has been on a buying binge of its own. It now has more than 70 compounds in mid-to late-stage development.
But What About Pfizer R&D? Will that be put on the Back Burner?
A little while ago this site posted a talk given by Pfizer on their foray into personalized medicine in
Here Pfizer had emphasized its commitment to discoveries in the personalized medicine area however the emphasis on worldwide may have been a hint of what is to come.
Just a few days ago Allergan CEO wrote a guest post in Forbes (edited by Matthew Herper)
There has been a lot of discussion about my views about pharmaceutical research and development. Let me cut to the chase. I’m pro-R&D, but I don’t believe that any single company can corner the market on innovation in even one therapeutic area. It doesn’t mean they shouldn’t do basic research where they have special insights, but even then they need to be open to the ideas of others. Innovation in healthcare is more important than ever. Other companies have had success with different models based on different capabilities, and we applaud every new drug approval. Here at Allergan, we’ve adopted a strategy we call “Open Science.” It is based on a simple concept: Sometimes great ideas come from places where they are least expected.
Allergan’s CEO goes on to stress innovation centers around academic centers such as in Boston and an emphasis on Alzheimer’s research and development but is this just shop talk or is there a agenda and strategy here?
This is all very interesting and might mean, with the size of this deal and that Allergan owns 40% of Pfizer, a massive sea-change in the way big pharma conducts R&D, possibly focusing on smaller “open-sourced” smaller players.
Our Open Science approach allows us to strategically invest in innovation and be more nimble so that we can increase our R&D efficiency. It has led to a robust pipeline of experimental medicines. We currently have 70 mid- to late-stage programs in the pipeline, and since 2009, we have successfully brought 13 new drugs and devices to the market.
It also allows us to invest in areas that other companies have abandoned, like central nervous system (CNS) treatments. In CNS, clinical development costs are higher, and market approval probability is lower. But treating these disorders can bring hope to patients of all ages. According to the Centers for Disease Control & Prevention, one in 68 children has autism spectrum disease. Alzheimer’s affects one in three people over the age of 85, based on data from the Chicago Health and Aging Project. Yet despite the 634 current open clinical trials for these diseases, there are no approved medicines for autism’s three core characteristics, nor drugs that treat Alzheimer’s underlying disease or delay its progression.
Other related articles published in this Open access Online Scientific Journal include the following:
Pfizer Inc. is in advanced talks to buy Allergan Plc for as much as $380 per share, according to people familiar with the matter, valuing the Botox maker at as high as $150 billion — if the U.S. government doesn’t get in the way of the drug industry’s largest-ever deal.
There has been 51 US company tax-inversion based relocations since 1982 with the rate picking up in the last 3 years (from Bloomberg Data). Many of these inversions in recent years have involved large pharma companies.
The companies aim to announce an agreement as soon as Monday, the people said, asking not to be identified because the discussions are private. The price being discussed is $370 to $380 per share, two of the people said. However, the U.S. Treasury Department’s letter on tax inversion deals, released on Wednesday, could delay the final agreement and change the terms of any transaction, another person said.
Pfizer shares sank 1.5 percent to $32.80 and Allergan fell 1.4 percent to $306.37 at 9:57 a.m. in New York on speculation that the deal could be hampered by the Treasury’s letter, which said the department is reviewing ways to address overseas acquisitions and plans to issue guidance later this week.
Risk Factor for Health Systems: High Turnover of Hospital CEOs and Visionary’s Role of Hospitals In 10 Years
Reporter: Aviva Lev-Ari, PhD, RN
High Turnover of Hospital CEOs: A New Risk Factor for Health Systems and Bond Investors
With a 17% CEO turnover rate and a record-setting $20 billion downgrade of not-for-profit healthcare debt, attention to the cultural fit of hospital CEOs is more important than ever, reports Phillips, DiPisa & Associates
The fit of a CEO with an institution’s culture can have a direct impact on patient care, and a poor fit can be financially catastrophic.
Chicago, IL (PRWEB) July 11, 2013
Already facing growing pressure to contain costs, jockey for market position, and manage physician groups, top executives at not-for-profit health systems are increasingly being evaluated by bond-rating agencies for patient care outcomes. Driven by new Medicare guidelines and Affordable Care Act regulations that require hospitals to track patient “fitness”—including readmission rates, quality of care and satisfaction surveys—the focus on the fitness of CEOs is intensifying even as turnover is spiking.
At 17 percent in 2012 (compared with about 14 percent in the private sector), the CEO turnover rate is already at near-historic highs and “may continue to increase,” says Thomas C. Dolan, former president of the American College of Healthcare Executives. The risks of executive failures are growing as well, with implications for a system’s ability to attract investors for its bond offerings.
The fit of a CEO with an institution can have a direct impact on patient care, and a poor fit can be financially catastrophic. A badly matched CEO can cost an institution tens of millions of dollars in direct costs and exponentially more in indirect costs associated with ratings downgrades that increase the cost of financing, physician, patient and staff attrition, delayed or halted programs, service expansion, and innovation. Once a hospital loses its competitive advantage and access to affordable financing, it’s difficult to recover.
Health systems—and bondholders—are already reeling from the financial consequences of leadership problems. Moody’s Investors Service downgraded a record-setting $20 billion of not-for-profit healthcare debt in 2012—a 213% jump from 2011—citing “management and governance issues,” “more competition… and weakened or negative revenue growth” as three main drivers, according to Carrie Sheffield, a Moody’s associate analyst.
A significant risk to investors right now is leadership instability. “A successful CEO helps define the culture and strategic direction of an organization,” says Mark Melio, Founder of Melio & Company, LLC, a financial advisor to not-for-profit healthcare institutions. “Mergers and acquisitions in healthcare are currently at an all-time high. Investing in innovative ways to improve outcomes and quality of care while managing expenses will continue for the foreseeable future. A capable CEO’s leadership in navigating these challenging times and making critical decisions has never been more important.”
For example, a successful not-for-profit health system in the southeast suffered a downward spiral at the hands of a tyrannical CEO whose personal ambitions conflicted with those of the health system. In less than four years, three senior executives resigned, staff morale plummeted, and poor acquisitions left the system without the financial resources to keep up with its competitors’ technological advancements and labor cost adjustments. As a result, physicians were leaving for the competitors, and the patients followed. Ultimately, the system’s failing financial health jeopardized its bond covenant obligations, triggering a ratings downgrade.
The system brought in a new CEO who fit with its culture. He stabilized the organization, restored its reputation, galvanized the staff, and stopped the revolving door of senior executives, leading the system from the brink of failure to a position of financial strength worthy of a ratings upgrade.
With CEO fitness now thrust into the spotlight, more investors will be scrutinizing a health system’s patterns of progress in construction and service-expansion projects, in regular technological upgrades, in the stability of its staff, in growth in patient numbers, and improvement in patient outcomes as potential indicators of the cultural fitness of the CEO. Evidence of a negative shift in patterns will compel investors to reevaluate the overall health of the institution.
Health systems are beginning to respond with greater urgency to the crisis by paying closer attention to cultural fit to reduce CEO turnover and sustain growth—a trend that will continue as organizations seek to regain or maintain financial stability and positive bond ratings, and seek to restore or reinforce investor confidence. Deliberate attention to CEO fit is now, and will remain, critical for the success of not-for-profit health systems and for their investors.
About Michael Corey
Michael Corey is a partner at Phillips, DiPisa & Associates and a former hospital senior executive. He specializes in senior-level executive recruitment for community healthcare systems, academic medical centers, medical group management, associations, and leadership for not-for-profit organizations.
Contact:
Michael Corey
Phillips, DiPisa & Associates
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mcorey(at)phillipsdipisa(dot)com
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About Phillips, DiPisa & Associates
Phillips DiPisa is a retained executive search firm serving the healthcare industry. Ranked as one of the top healthcare recruiting firms in the country, Phillips DiPisa is known as Leaders in Recruiting Leaders by its growing base of clients across the country, drawing on a national pool of candidates. For more information, please visit
I power/cover disruptive innovators reinventing healthcare.
What’s The Role Of A Hospital In 10 Years?
Dr. Eric Topol was named #1 Most Influential Physician Executive in Healthcare of 2012 by Modern Healthcare so his views are closely watched. In addition to his role as a cardiologist, geneticist and author of the Creative Destruction of Medicine, he’s also the Editor-in-Chief of Medscape (WebMD’s leading physician offering). Every health system CEO I’ve spoken with readily admits that we’ve essentially had a hospital building bubble with an over-capacity of 40-50% of hospital beds as we shift from the “do more, bill more” fee-for-service system to the “no outcome, no income” fee-for-value era.
Topol has gone on the record stating that in the future, the only real reason to have hospitals is for their Intensive Care Units if digital medicine is adopted. His recent tweet of his vision was provocative comparing it to Wired’s vision. Despite the widely held view of over-capacity and alternative scenarios such as Topol’s, I have yet to hear about the health system board thinking in these terms. With the board’s fiduciary responsibility to think further out than the CEOs since their tenure usually outlives CEO tenure, is this not a dereliction of their duties?
While some healthcare leaders may dismiss Topol, his ideas aren’t without precedent. In Denmark, they realized that most people weren’t having their end-of-life wishes met — generally speaking people want to be with family and friends at home while being warm, dry and pain free. A shift in approach shifted the norms from well over half of people dying at hospitals, to 92% dying at home according to their wishes. A mix of remote monitoring, video conferencing and house calls enabled this. This also happens to be far less expensive — not an insignificant point in these budget-constrained times.
“History doesn’t repeat itself, but it does rhyme.” – Mark Twain
Lessons From Newspapers For Health Systems’ Immense Challenge
Health system CEOs and board have an immense challenge I have heard described as the equivalent of going down a rough river with one foot in one canoe called fee-for-service (FFS) and their other foot in another kayak called fee-for-value (FFV). The objectives of FFS and FFV are diametrically opposed and puts hospitals in an untenable situation. For example, in one they operate like a hotel wanting to have heads on beds maximizing occupancy. While in the other, a hospitalization represents a failure in the system to be avoided.
In theory, a non-profit health system board has an easier decision to make since topline revenue shouldn’t matter as much as long-term economic sustainability. Thus, they could make decisions that would harm their topline revenue as long as it was economically sustainable. Unfortunately, health organizations are dooming their innovation to failure the way they are going about their reinvention.
While no analogy is perfect, health system boards would be well advised to study what newspaper industry leaders did (or perhaps more appropriately, didn’t do) when faced with a dramatic industry change. Turn back the clock 15 years and the following dynamics were present:
Newspaper leaders knew full well that dramatic change was underway and even made some tactical investments. However they didn’t fundamentally rethink their model beyond window-dressing.
Newspapers were comfortable as monopoly or oligopoly businesses allowing for plodding decisions. Their IT infrastructure mirrored the plodding pace with expensive and rigid technology architectures.
Newspaper companies bought up other newspaper chains and took on huge debt.
Owning printing presses was a de facto barrier to entry allowing newspapers unfettered dominance.
Depending on one’s perspective, it was the best of times or the worst of times to be a leader of local media enterprise.
Before they knew it, owning massive capital assets and the accompanying crushing debt became unsustainable. The capital barrier to entry transformed into a boat anchor while nimble competitors dismissed as ankle-biters created a death-by-a-thousand-paper-cuts dynamic. Competitively, newspaper companies worried only about other media companies or even MicrosoftMSFT +2.24%, but their undoing was driven by a combination of craigslist, monster.com, cars.com, eBay, and countless other substitutes preferred by the majority of their customers. In addition, there were easier ways to get news than newspapers. Generally, the newspaper’s digital groups were either marginalized or unbearably shackled so that the encumbered digital leaders left to join more aggressive competitors. The enabling technology to reinvent local media didn’t come from legacy IT vendors who’d long sold to newspaper companies, but from “no name” technologies such as WordPress, Drupal and the like.
The parallels with health systems today are clear. Consider the present dynamics:
The handwriting is on the wall for health systems but there is little evidence that organizations are aggressively moving at a scale corresponding to the enormity of the change.
Health systems have been aggressively gobbling up other healthcare providers and frequently taking on debt to finance the growth. Concurrently, health systems often have capital project plans that equal their annual revenues even though no expert believes the answer to healthcare’s hyperinflation is building more buildings. Consider the duplicative $430 million being spent in San Diegoto build two identical facilities just a few miles apart as Exhibit A of the problem. Studying other countries that shifted from a “sick care” to a “health care” system, more than half of their hospitals closed. They simply weren’t needed or appropriate.
Until recently, complex medical procedures always took place in an acute care hospital setting. Increasingly they are being done more and more in specialty facilities that can do a high volume of particular procedures at a signifiantly lower cost. With “hospital at home” programs proving to be move effective than regular hospitals for an increasing number of procedures, Topol’s view of only needing hospitals for ICUs starts to come into view. Company-sponsored Centers of Excellence programs are rapidly growing with companies ranging from Boeing to Lowes to Pepsico to Walmart further obviating the need for duplicative infrastructure for non-emergent surgeries. The byproduct is making every community hospital in competition with Mayo and Cleveland Clinic with inferior outcomes in most cases. [See graphic below]
Just as newspapers were implementing multimillion dollar IT systems while nimble competitors were using low and no cost software to disrupt the local media landscape, health systems are similarly implementing complex systems to automate the complexity necessary in a multi-faceted system. Meanwhile, disruptive innovators are implementing new models at a fraction of the cost and time. For example, it’s well understood that a healthy primary care system is the key to increasing the health of a population. Imagine if a fraction of the billions being spent by mission-driven, non-profit health systems on automating the complexity of the old model was redirected towards the reinvigoration of primary care. They’d further their mission and lower their costs. Of course, they’d likely see revenues drop but presumably maximizing revenues isn’t the mission of a non-profit. See Health Systems Spending Billions to Prepare for the “Last Battle” for more.
The plodding pace and scale of innovation at most health systems isn’t up to the enormity of the task. The vast majority of health system innovation teams are constrained by how they have to fit innovation into an existing infrastructure. That approach rarely, if ever, leads to breakthroughs, as its true intent is to make tweaks to a current system rather than a rethink from the ground up.
New Wave of Disruptive Models in Healthcare
Image is courtesy of Jason Hwang, M.D., M.B.A. Executive Director, Healthcare of the Innosight Institute and co-author of The Innovator’s Prescription.
Compared to newspapers, the scale and importance of the challenge is far greater for health systems so they must aggressively take action or risk their future viability.
Rx for Healthcare From a Newspaper Industry Executive
In the midst of the newspaper industry disaster, there is one notable bright spot from an individual who has gone against the conventional wisdom that newspapers are doomed to fail. His name is John Paton and he’s reinventing local media. Highlighted below are some of what he’s done to turn a bankrupt (creatively and financially) enterprise into a profitable, dynamic and rapidly growing enterprise attracting the all-stars of the industry such as Jim Brady. It hasn’t been without continued challenges as he transparently reports on hisblog.
There has been an expression in traditional media that analog dollars are turning into digital dimes. Rather than lament that, here’s John Paton’s response:
“And it is true that print dollars are becoming digital dimes to which our response at Digital First Media has been – then start stacking the dimes. All of that requires a big culture change. A change that requires an adoption of the Fail Fast mentality and the willingness to let the outside in and partner. Partnering is vital to any media company’s growth whether it is an established media company or start-up. We are going to marry our considerable scale with start-up innovation to build success.”
It’s worth noting that those “digital dimes” are often more profitable than the “analog dollars” of the past because much less overhead is required. It’s well understood that hospitals are shifting from revenue centers to cost centers so it behooves healthcare provider leaders to adopt new models that are well-positioned to be profitable in the fee-for-value era.
The following is John Paton’s 3-point prescription for reinvention that led to a 5x revenue increase and halving of capital expenses. This resulted in his organization going from bankruptcy to $41 million of profit in two years.
Speed to market: One new product launched per week.
Scaling opportunity: Sourced centrally, implemented locally. Ideas can come from all over. Identify the best ideas/people from all over.
Leverage partners: Feed the fire hose of ideas from outside.
Unfortunately, before John Paton was able to affect this level of change, scores of newspaper employees lost their jobs while traditional newspaper executives dawdled. It is the rare leader that can create the sense of urgency necessary to affect this scale of change before the enterprise is a hair’s breath from extinction. It might be one of those tough-as-nails nuns running a health system that isn’t concerned about bonuses that refocuses their mission from growth to health. As the old oil filter ad says, “you can pay now or pay later” – of course, the cost is much greater if change is delayed. The only question is whether health system leaders will have the courage to make the change before the inevitable hurricane hits with full force.
Applying Reinvention Lessons into Healthcare
Listed below are some ideas and examples of how this approach can be applied to tackle the enormous challenge facing health system leaders. The wave of disruptive innovation is building with pioneers such as WhiteGlove Health and Qliance forging new territory and then others putting their own twist on it.
[Disclosure: The company where I’m CEO, Avado, provides Patient Relationship Management technology for some of the organizations mentioned which is why I have a view into their projects.]
Fresh, Outside Perspective is Imperative
As John Paton brought in outside advisors such as Jeff Jarvis and Jay Rosen, health systems would be well-advised to do the same. They can go a step further and partner with innovators driving new models. They can be project managers or partners. One example is Dr. Rushika Fernandopulle founded Iora Health and was highlighted in now-famous The Hot Spotters article linked to in The Hot Spotters Sequel: Population Health Heroes. Iora Health has partnered with hospitals such as Dartmouth-Hitchcock. From reports I hear, their CEO is using Iora Health to catalyze change amongst his medical staff as they can see a modern delivery model in action that is unencumbered by the flawed fee-for-service model.
Like local media executives in the late 90’s, healthcare leaders can view the present time period as either the best or worst time to be in their role. The health system leaders who believe it’s the best of times would do well to ask themselves “What Would John Do?” John Paton demonstrates how a strong leader can reinvent and reinvigorate a lumbering giant turning it into a dynamic organization.
Gil Bashe #FPHealth 
The fit of a CEO with an institution’s culture can have a direct impact on patient care, and a poor fit can be financially catastrophic.
2012pharmaceutical
Amandeep Kaur
Aashir Awan, Phd
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