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Recent reporting from the @nytimes suggested that Covidien's buyout of Newport was a killer acquisition: https://nyti.ms/3b7e442 . So, I did some digging and last Friday, @cgousu published my findings: https://medium.com/cgo-benchmark/did-an-8-year-old-merger-cause-todays-ventilator-shortage-7ad983bef562. Here's a thread of what wasn't in the NYT. 1/12
To set the stage, Newport Medical contracted with HHS to supply 10,000 ventilator units in 2010 at $3000 per unit. But after they were acquired by Covidien, the company pulled back from the deal to produce ventilators. 2/12
One line in the NYT connected the dots: "Government officials and executives at rival ventilator companies said they suspected that Covidien had acquired Newport to prevent it from building a cheaper product that would undermine Covidien’s profits..." 3/12
I went looking for the Newport/HHS contract, which isn't available, and found the original HHS request for proposals: https://beta.sam.gov/opp/20a5c00362b44291906bb5d5644c9276/view. Those who claimed the deal was a killer acquisition should take a look at it because it complicates the story. 4/12
First off, the original solicitation in 2008, which was never awarded, had the price of the ventilators at "<$2000/fully kitted unit" and anticipated "multiple contracts with incremental and performance-based funding." And yet, only Newport agreed to *$3000* per unit. 5/12
Second, and far more important, these ventilators weren’t originally intended to be held within the strategic reserve. Rather, they were to be a guaranteed stream of ventilators when demand was high. 6/12
Suppliers had concerns with the contract design in 2009 and the agency officially responded: "It is highly unlikely that the government will not need ventilators." Still, HHS made no promises to follow up the contract with a purchase order for 10,000 units. 7/12
Moreover, HHS made clear that, "Materials and the storage [of parts] is the responsibility of the manufacturer." In other words, the original deal was a call option where the buyer has the option to purchase a product at a certain time for a certain price. 8/12
So, one big reason that this HHS ventilator project was innovative was because it used a unique financial instrument. To be fair, we don't know exactly what Newport said it would deliver to HHS, but the original deal would have been a ventilator call option. 9/12
The big question is whether or not Newport could have produced a $3000 ventilator that sufficed its deal with the government. I think it is unlikely, since low cost ventilators arrive at their price by stripping out features: https://www.medicaldesignandoutsourcing.com/low-cost-ventilator-wins-sloan-health-care-prize/. 10/12
For more on the Covidien/Newport deal, @geoffmanne & @AuerDirk have a great blog post @TOTMblog: https://truthonthemarket.com/2020/04/03/the-covidien-newport-merger-killer-acquisition-or-just-a-killer-story/. 11/12
The most likely story is that the federal government tried to low-ball a project, got a bite from Newport, and that project ultimately failed when Covidien realized they were taking a loss on every single product. That's not a killer acquisition, that's poor planning. 12/12
