Did an 8-year-old merger cause today’s ventilator shortage?

By William Rinehart

Published:

Was it a killer acquisition?

To many advocates, scholars, and policymakers, however, this wasn’t a case of a company getting out of a bad contract but instead is evidence of a company getting into an anticompetitive merger. As Matt Stoller noted in his newsletter, “The merger by any standard was a clear-cut antitrust violation.” As he continued, “Covidien bought Newport to take its competitive product out. That’s called a ‘killer acquisition,’ meaning that the goal is to undermine a potentially innovative or lower prices product line.”

Digging into the details of HHS’s ventilator project

But, the $3,000 price agreed to by Newport Medical and HHS exceeded the original price tag of $2,000. The initial request for proposals, which came out in 2008, put the price at “<$2000/fully kitted unit.” The White House’s 2009 budget, which is also cited in the NYT report, further confirms this, since the budget laid out a “next-generation ventilator. It included low cost ($1,000-$2,000), wide patient usage, user-friendliness, closed-loop circuit, portability, easy storage, universal interchangeable parts, internal oxygen source, and remote interface.”

Newport could never deliver, regardless of the merger

Some read this story and see Newport as having an innovative ventilator project that was taken off the market through a merger. But it is more likely that Newport was trying to create low-cost ventilators and failed. Ventilators are costly because they require high-quality materials, need to perform a range of actions, and have to meet specific medical guidelines set by the Food and Drug Administration.

  • Even today, the mechanical ventilator market remains highly competitive, and fractured, with at least eleven different producers; and finally
  • If the deal was truly a killer acquisition and it would have the effect of boosting Covidien’s profits, the value should have been larger than $108 million since “an acquisition value out of line with current revenues may be an indicator of the significance.”

Conclusion

Given the facts, it is hard to claim this was a killer acquisition. The more likely story is that the federal government tried to low-ball a project, got a bite from Newport, and that project ultimately failed when Newport realized they were taking a loss on every single product.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.