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In the Headlines-April 17th, 2015

In The Headlines

GE Returns to Its Industrial Roots

General Electric (GE) is on its way to exorcising its financial demons. It took 14 years, a near-death experience and a flat-lined stock price, but Jeffrey Immelt is now getting out of the banking business and returning G.E. to its industrial roots. It may have taken a long time, but the timing works now on many levels.

Mr. Immelt’s timing has not always been so good. He took over as chairman and chief executive of GE on Sept. 7, 2001, and was at the helm for a financial collapse that led GE Capital to issue government-backed debt and cost the company its prized AAA rating.

Since 2009, Mr. Immelt has been shrinking the unit’s balance sheet. More recently, he has begun hacking in dramatic fashion. To start, the $260 billion pillar of corporate America said it would sell most of its commercial real-estate assets to the buyout firm Blackstone, Wells Fargo and other buyers, in a collection of transactions valued at $26.5 billion. Over the next two years, GE plans to refocus its financial operations exclusively where they are directly related to benefiting its operations in healthcare equipment, energy and aviation. That will mean shedding $200 billion of assets still on GE Capital’s books at the end of 2014 and fully offloading its publicly traded consumer credit arm, Synchrony Financial, to investors in a $65 billion divestment.

It is an opportune moment to act. The 31% rise in Synchrony’s shares since going public in August illustrates the growing appeal of financial assets and how lenders with large wholesale financing needs can exist on their own. What is more, many banks in the United States are desperate for higher returns and have loan-to-deposit ratios low enough to take on some of GE’s corporate loans, as well as its equipment, inventory and franchise finance businesses.

In three years, when this contraction has been completed, GE expects to derive 90% of its earnings from industrial operations compared to 58% today. That is a GE more like the one that Reg Jones passed on to Jack Welch in 1981. The aggressive push into finance was not irrational, but the financial and regulatory arbitrage that benefited GE during the 1990s and early part of this century was brought to a grinding halt by the financial crisis and the greater oversight that followed.

GE Capital’s designation as a systemically important financial institution created a conundrum for the Connecticut-based conglomerate. The regulatory overhang turned off an entire generation of portfolio managers, and the unit’s return on equity was at 8.6% last year, below its cost of capital. Before its recent restructuring announcement, GE stock was down about a third since Mr. Immelt took over. Reducing GE Capital to a smaller size should rectify the “Immelt discount” in time for him to entertain a graceful succession. Handing another $90 billion back to shareholders in dividends, buybacks and Synchrony stock over the next couple of years will further smooth Mr. Immelt’s exit.

With aggressive investors increasingly taking on large companies like Apple and PepsiCo, Mr. Immelt’s bold step should help keep him out of the crosshairs. Even repatriating some $36 billion of cash held overseas, which will incur a hefty tax charge, suggests the mark of a leader willing to get a move on rather than wait for rules to change. It also demonstrates his eagerness to establish his legacy.

Drugmakers Face the Loss of the “Hard Switch”

Actavis, maker of the blockbuster Alzheimer’s drug Namenda, is not the first pharmaceutical company to attempt what is known in the industry as “product hopping” or the “hard switch.” Facing the loss of patent protection and profits on top-selling brands, drugmakers sometimes stop or sharply limit sales of drugs to force consumers to switch to a somewhat modified, newly patented version before generic rivals have a chance to get into the market.

The practice is under the spotlight in a high-profile antitrust case brought against Actavis by New York Attorney General Eric Schneiderman. Last December he persuaded a federal district court to issue an injunction preventing Actavis from halting sales of its original Alzheimer’s drug in favor of a new slow-release version. Actavis has appealed the ruling, and the U.S. Court of Appeals for the Second Circuit in New York will hear oral arguments soon.

Namenda, produced by Actavis subsidiary Forest Laboratories, is the company’s top-earning drug, with about $1.5 billion in sales last year. With the patent on the old version of Namenda expiring this month, Actavis is intent on building a market for Namenda XR, its once-a-day pill for Alzheimer’s sufferers. The patent for Namenda XR doesn’t expire until 2029. “If we do the hard switch and we convert patients and caregivers to once-a-day therapy …  it’s very difficult for the generics then to reverse-commute back, at least with the existing Rxs,” Actavis Chief Executive Officer Brent Saunders said on an earnings call in January 2014.

Generic drugmakers, pharmacy chains, insurers, and consumer and public health advocates have long accused brand-name pharmaceutical companies of gaming the patent system to protect their monopolies on popular drugs. In his ruling in December, U.S. District Court Judge Robert Sweet cited Saunders’s comments to analysts, as well as investor presentations and internal company e-mails, as proof that the use of the hard switch was anticompetitive. “This could really have a devastating effect,” says Kevin McDonald, an antitrust lawyer at Jones Day, who is defending British drugmaker Reckitt Benckiser Group in a similar case in Pennsylvania brought by drug wholesalers and other private plaintiffs over the anti-opioid dependency drug Suboxone. McDonald contends that his client, like Actavis, is being targeted for making what it believes is a safer, better version of Suboxone. If the Second Circuit fails to stop the New York attorney general’s move to “take over the factory,” McDonald says, drug innovation will be chilled. “Improvement of old products, even if it’s just tweaking, can lead to much bigger breakthroughs,” he says.

Over the past decade, several brand-name drugmakers, including Abbott Laboratories and AstraZeneca, have faced product hopping-related claims. The outcomes of those cases, all brought by generic drugmakers, insurers, and other private plaintiffs, have been mixed. Michael Carrier, an antitrust expert at Rutgers School of Law at Camden, says the Second Circuit, as the first federal appellate court to weigh in on the dispute, could have a profound effect on the drug industry. He hopes the court will establish that the hard switch violates antitrust law—and continue to bar Actavis from pulling the old Namenda until this August, when generic substitutes should be available. “It’s the only way to remedy the anticompetitive harm,” says Carrier, who joined an amicus brief supporting New York state.

If the appeals court does decide that Actavis’s hard switch is anticompetitive, many observers say plaintiffs’ lawyers who specialize in pharma antitrust claims will be emboldened to sue Actavis and other drugmakers that have engaged in product hopping. “It would become an invitation for lawsuits all over the place,” says University of Iowa antitrust professor Herbert Hovenkamp, who also joined an amicus brief supporting New York’s case. And because plaintiffs in antitrust cases can collect treble damages, the costs to defendants, he says, could be steep. “We’re talking about hundreds of millions, if not billions, of dollars in damages,” Hovenkamp says.

Drugmakers that have relied on the hard switch to maintain market share could also face a blow to earnings. “If it’s a precedent-setting ruling, it could cost the industry tens of billions of dollars over the next decade,” says David Maris, an equity research analyst at Bank of Montreal. He estimates that Actavis alone could take a 5% hit to annual earnings if its plans for Namenda XR are thwarted. Jerry Avorn, a Harvard Medical School professor and pharma industry critic, says he is often amazed at the creativity of lawyers for big pharmaceutical companies and will not bet against their chances of keeping the hard switch alive. “However this goes,” he says, “I think we’re destined to see many more years of patent shenanigans.”

1. http://nyti.ms/1DW5dj3 – NY Times Dealbook
2. http://bloom.bg/1aOtISz – BusinessWeek

The Good News Is . . .

• Loan applications to purchase a home rose for the third straight week. Total mortgage application volume rose 0.4% week-to-week on a seasonally adjusted basis for the week ending April 3, according to the Mortgage Bankers Association (MBA). The move was driven by a 7% surge in applications by homebuyers. Purchase applications are now 12% higher than the same week one year ago

• Constellation Brands, Inc., a leading wine, beer and spirits company, reported earnings of $1.03 per share, an increase of 27.2% over year-ago earnings of $0.81. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported revenues of $1.5 billion, an increase of 4.8%. Management attributed the company’s results to higher volume for its beer business.

• Royal Dutch Shell agreed to buy the BG Group for $70 billion. It is the first major deal for an oil and gas producer since prices started falling last summer. Shell said that it would pay for the acquisition with a mix of cash and stock. In buying BG, Shell is concentrating on the fast-growing business of producing and selling liquefied natural gas. It will also become a major player in Brazil’s offshore oil fields, where Shell’s exposure has been small. Shell is taking advantage of the financial struggles of BG. Before the deal was announced, BG had watched its shares fall more than 30 percent since May.

1. http://reut.rs/1HiLGcd – Reuters
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1PBg84V – Constellation Brands, Inc.
4. http://nyti.ms/1yVfsg3 – NY Times Dealbook

Planning Tips

Tips for Cutting Your Healthcare Costs

If you are like most Americans, you are shouldering a larger portion of your health care costs. But as more insurers raise deductibles and switch from fixed-dollar co-payments to coinsurance, which bases out-of-pocket expenses on a percentage of the total costs, you have an incentive to take more control over how much you spend. Below are some tips on how to save money on your out of pocket healthcare expenses.

Consider the facility where you get care – First think about where you will see your doctor. Doctors often work at outpatient surgery centers as well as hospitals. What the same doctor charges for the same service in these different locations can vary widely. Emergency care is another area where the type of facility can make a big difference in cost. The average in-network cost of an emergency-room visit is about $933, which you would likely pay out of pocket with a high-deductible policy. But a visit to an urgent-care center costs only $71, on average. And a trip to a convenience-care clinic averages just $33. Plus, some insurers boost the coinsurance rate for non-emergency visits to the ER and waive the consumer’s coinsurance payment entirely for convenience-care centers. Sometimes you need high-level emergency-room care, but not always, and it is best to know your options before an emergency. A third aspect of treatment where the choice of facility you use can save you money is on lab tests and imaging. Different facilities charge vastly different prices for x-rays and tests. For example, the average in-network cost of an MRI at a hospital is $1,145, but the average in-network cost at an independent radiology facility is just $560. If you have not met your policy’s annual deductible, you could save $585 by going with the lower-cost facility. But even if you have met your deductible and you are on the hook only for a 20% coinsurance payment, choosing the independent radiology facility could still save you $117 in out-of-pocket costs.

Manage your medications – Some brand-name drugs don’t have a generic equivalent yet, but they may have a therapeutic equivalent, which is in the same class of drugs but is chemically a little different, says Kang. For example, Mavik, an ACE inhibitor used to lower blood pressure, has a retail price of price of about $33 for a 30-day supply, but Lisinopril, also an ACE inhibitor, is just $7, says Blair. If your doctor lets you switch to the therapeutic equivalent, you could save more than $312 per year. Also, think about getting your prescriptions through the mail. Mail-order pharmacies often provide a three-month supply of drugs for the same price as a one-month supply at a local pharmacy. This strategy could save you more than $1,000 per year on the cost of a drug like Crestor, for example.

Use all the benefits you are entitled to – Many insurance plans must now provide certain preventive-care screenings without charging deductibles or co-payments. Depending on your age, this rule may apply to blood-pressure, diabetes and cholesterol tests, mammograms and colonoscopies, flu shots, routine vaccines, well-baby and well-child visits, as well as other preventive services. More than 40% of large employers surveyed by the National Business Group on Health now offer discounts for participating in wellness programs, and the average incentive to employees is $380. Many employers offer cash if you participate in a healthy-living program; for example, 22% of employers offer discounts on health-insurance premiums for people who participate in tobacco-cessation programs. Others offer free weight-loss or stress-reduction programs and incentives for signing up. Medicare beneficiaries also get an expanded roster of benefits without co-pays or deductibles, such as mammograms, screenings for cervical and colorectal cancer, flu shots, pneumonia shots, and an annual wellness visit and personalized prevention plan.

Use prescriptions for OTC drugs – Starting this year, you can no longer use FSA (flexible spending account) or HSA (health savings account) money for nonprescription drugs (except insulin). But you can use the money for over-the-counter drugs if you get a prescription. Ask your doctor for a prescription for any medications you use regularly, such as pain relievers, allergy medications, anti-fungals and cough-and-cold medicines. You can still use FSA and HSA money for certain over-the-counter medical supplies—such as bandages, contact lens solution, hearing aids, reading glasses and first aid kits—without a prescription.

Ask providers for discounts – If you have a high-deductible policy, make sure you are getting the insurer’s negotiated rate rather than the much higher list price, even if you have not hit your deductible yet and are covering the cost yourself. And make sure that all of your care is counted toward the deductible. If you are in your deductible period and paying for a test or procedure yourself, get some leverage by paying cash. Some providers will cut your bill by 20% if you pay them in cash. Make sure you are getting the insurer’s negotiated rate, and submit the claim yourself so that it counts against your deductible. If you are financially strapped, negotiate a lower rate. After getting the bill, ask the provider or hospital for a break if you pay a lump sum right away. Tell them what amount of money you can afford to pay.

1. http://fxn.ws/1onrhtp – Fox Business
2. http://bit.ly/1O5aNz8 – AARP
3. http://bit.ly/1cxoeaE – Kiplinger
4. http://bit.ly/1z8Tvu2 – HealthGrades.com
5. http://bit.ly/1b4qtD0 – AgingCare.com
6. http://cnnmon.ie/1Cz3076 – CNN Money

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

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