Amazon’s Impact on Healthcare M&A › amo_hub_content...payments network for payers and providers. The network will be available on Amazon Web Services and will deploy technologies

2/25/2019

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Amazon’s Impact on Healthcare M&A

Prepared Exclusively for MGMA Alabama by Founders Advisors

2STRICTLY CONFIDENTIAL

Michael White Biography

20 years experience in M&A and capital raising across all Healthcare sectors

Senior Banker at Barclays and Bear Stearns

Chief Financial Officer at Carbylan Therapeutics

B.S. International Finance, University of Alabama

M.B.A. Finance and Accounting, University of Chicago

Michael White, Managing Director of Founders Advisors’ Healthcare practice, is a strategic finance professional with operating experience as a Chief Financial Officer. He has over 20 years’ experience advising healthcare clients on a range of strategic alternatives including IPOs, public and private equity and debt capital raises, joint ventures, licensing and buy-side and sell-side mergers and acquisitions.

Michael spent seven years at Bear, Stearns & Co. in New York where he served in a series of positions of increasing responsibility in the healthcare investment banking group. He then joined Barclays where he was a Vice President and Director in the healthcare investment banking group on the West Coast for six years. Most recently Michael has acted as a consultant, advising clients on a variety of strategic alternatives across multiple healthcare subsectors as well as serving as Chief Financial Officer of Carbylan Therapeutics, a specialty pharmaceutical company. Michael started his career at SouthTrust Bank and its affiliate, PRN Mortgage Capital, providing financing and advisory services for companies primarily in the post-acute care space.

Michael received his B.S. in International Finance from the University of Alabama and his M.B.A. with concentrations in Finance and Accounting from the University of Chicago Booth School of Business. A native of Talladega, Alabama, Michael and his wife Gayle have returned to Birmingham, where they live with their two children, Emelia and Madeline.

Michael White – Managing Director, Head of Healthcare Practice Michael White – Managing Director, Head of Healthcare Practice

Detailed BioDetailed Bio

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Vertical Integration in HealthcareCapturing the customer at different touch points along the continuum creates a stickier buying experience and expands addressable markets.

Created comprehensive healthcare diagnostics company offering customersend-to-end solutions for drug and diagnostics development andcommercialization

Strengthens partnerships with pharma, physicians, payors and patients

First sign of divergent approaches between Lab Corp and Quest

o Quest focused on lab services and outreach acquisitions while LabCorphas focused on broadening technology and diagnostic service menu

Walgreens/LabCorp partnership announced June 2017

Acquired Sequenom for $371 million in July 2016 and Chiltern for $1.2 billion(~12.6x EBITDA) in July 2017

Avantor formed through New Mountain Capital's purchase of Covidien'sMallinkrodt Baker specialty chemicals subsidiary in 2010 for $290 million

VWR “acquired” to create a vertically integrated organization, serving a globalcustomer base in all areas of their activities, from research through production

VWR historically focused on tuck-in acquisition opportunities across threepillars: enhanced market position, geographic expansion and new productareas

o Acquired Therapak, PAW, JM Separations, Reliable and BioArra in2016 for $164 million

InVentiv split equally between clinical and commercial divisions

o Acquisition driven by revenue synergies from cross-selling andleveraging commercial solutions business to win contract business;NewCo known as Syneos Health

o Broad suite of capabilities bridges clinical gap and more effectivelycommunicates clinical benefits to payers / PBMs

Evolving biopharma landscape illustrated by shift to longer and more strategicrelationships with customers

o InVentiv allows INC to provide a comprehensive suite of end-to-enddrug development solutions

Complementary capabilities that strengthen ThermoFisher’s unique valueproposition for biopharma customers

Provides entry into attractive, high-growth, fragmented contract developmentmarket

o Development Services - $2 billion market (12% of Patheon revenues)

o API - $24 billion market (27% of Patheon revenues)

o Finished Dosages - $15 billion market (61% of Patheon revenues)

May 2017

Nov 2014 May 2017

May 2017

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Timeline of Key Events in Healthcare Services

• UnitedHealth Group announces acquisition of Catamaran in 2015

• United’s successful integration of MCO, PBM and HC delivery assets serves as a blueprint for others and has resulted in leading market positions across healthcare services

UNH Acquires Catamaran

March 2015

• Aetna attempts to acquire Humana in July 2015 to significantly increase its footprint in Medicare Advantage

• At the same time Anthem attempts to acquire a resistant Cigna

• Result: Both deals are blocked by the Department of Justice in early 2017

Horizontal M&A

July 2015

• CVS announces acquisition of Aetna in December 2017, confirming speculative rumors in the months prior to the announcement

• Cigna announces acquisition of Express Scripts in March 2018

• Walmart rumored to be in talks to acquire Humana in March 2018

Vertical M&A

Late ‘17 –Early ‘18

• Anthem announces decision to build internal PBM, IngenioRX, in October 2017

• Centene announces ‘transformative’ partnership with RxAdvance in March 2018

Vertical PBM Integration

Late ‘17 –Early ‘18

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Amazon at a Glance

Attract and retain users to its platform with a better customer experience

Invest in large, upfront, fixed cost (e.g., warehouses and datacenters)

Bring standardization to the forefront of fragmented markets and functions (e.g., logistics)

Add transparency and a platform for companies to distribute goods and services

Fulfilled by Amazon (FBA) – provides delivery, inventory management and customer return services to vendors as an outsourced service

Amazon Web Services (AWS) – provides datacenter management and cloud services across industries

Public Market OverviewPublic Market Overview Relative Stock Price PerformanceRelative Stock Price Performance

By the NumbersBy the Numbers Amazon’s PlaybookAmazon’s Playbook

Employees among Amazon, JP Morgan and Berkshire Hathaway

Sellers on Amazon

Active customers

Amazon Prime subscribers

US customers within 20 miles of an Amazon fulfillment node

Customers Eligible for same-day Prime delivery

1.2 million

5 million

310 million

121 million

195 million

78 million

All public market figures in millions, except per-share figures.

Stock Price $1,588.22% of 52-Week High 77%

Equity Value $780,138Plus: Debt 49,289Less: Cash 31,750

Enterprise Value $797,677

LTM NTMRevenue $232,887 $275,002EBITDA 27,762 42,394

EV / Revenue 3.43x 2.90xEV / EBITDA 28.7x 18.8x

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Amazon’s Healthcare Timeline | 2016 – 2017

Amazon and Merck unveil the Alexa Diabetes Challenge to explore how voice-command technology can support chronic disease management.

Amazon partners with WebMD to provide physician-reviewed answers to health-related questions asked through Alexa.

Amazon CEO Jeff Bezos invests in the San Francisco-based, anti-aging startup Unity Biotechnology through Bezos Expeditions.

American Heart Association and Amazon Web Services form a strategic collaboration to enhance the AHA's Institute for Precision Cardiovascular Medicine.

Amazon equips Alexa to offer health advice in a partnership with Boston Children's Hospital. Additional Alexa-based services follow, including first aid assistance through a partnership with Mayo Clinic.

April 2016 July 2016 November 2016 March 2017 April 2017

CVS CEO Larry Merlo notes on its Q2 earnings call that the "barriers to entry are high" for companies like Amazon that may be looking to move into the pharmacy business.

Reports surface of Amazon’s secret healthcare team codenamed 1492. The group is reportedly exploring hardware and software projects as well as telemedicine and health applications.

Teva Pharmaceutical Interim President and CEO Yitzhak Peterburg notes the global healthcare industry is facing a "huge disruption" from the technology sector, specifically noting the "Amazons and Googles."

Amazon acquires Whole Foods for $13.7 billion, adding 479 locations, additional distribution coverage and potentially moving Amazon closer to the pharmacy market.

CNBC reports on Amazon's expanded hiring of drug and medical supply distribution executives and offering direct shipment of medical supplies to U.S. customers.

May 2017 June 16, 2017 June 28, 2017 July 27, 2017 August 8, 2017

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Amazon’s Healthcare Timeline | 2017 – 2018

UnitedHealth Group comments on Amazon as a potential partner rather than a competitor in the pharmaceutical business.

CNBC notes Amazon's Alexa is not HIPAA compliant.

Reports surface of talks with pharmacy benefit managers about potential drug contracts.

Amazon announces plans to invest more than $5 billion into a second company headquarters in North America.

CNBC speculates that Amazon's new pickup points in the U.S. could help shoppers quickly access prescriptions.

August 15, 2017 September 7, 2017 September 20, 2017 September 25, 2017 October 17, 2017

Amazon rescinds an application for a wholesaler pharmaceutical license in Maine.

Amazon has reportedly held preliminary discussions with several generic drug manufacturers, including Mylan and Novartis, regarding the company's potential entry into the pharmacy business.

Rumors surface that Amazon Web Services is reportedly planning to announce a partnership with EHR vendor Cerner, but no news of the potential partnership has been discussed since.

Amazon claims it will use its pharmacy licenses in Tennessee and Indiana to sell medical devices and supplies instead of prescriptions.

Reports surface that Amazon has acquired more than 10 wholesale pharmacy licenses from state boards over 2017, fueling rumors over the retailer's potential entrance into the pharmaceutical supply chain.

October 27, 2017 November 13, 2017 November 22, 2017 November 30, 2017 December 1, 2017


Amazon’s Healthcare Timeline | 2018

Reports surface that Amazon has quietly launched an exclusive line of 60 over-the-counter healthcare products called Basic Care.

Sources familiar with Amazon's plans say it is pushing to turn its medical supplies business into a major supplier to U.S. hospitals and outpatient clinics.

The company announces its collaboration with JPMorgan and Berkshire Hathaway to administer and share risk for their employees' medical care.

According to analysts, Amazon's exploratory healthcare team has grown to more than 30 people.

Amazon begins fielding applications for a HIPAA Compliance Lead, according to a job listing on its website.

January 16, 2018 January 24, 2018 January 30, 2018 February 13, 2018 February 21, 2018

Fred Hutchinson Cancer Research Center and AWS working to apply machine learning to prevent and cure cancers. News surfaces of a project codenamed Hera, intended to help commercial health insurers by reviewing EHR data to point out coding mistakes or misdiagnoses.

CNBC reports that Amazon has built a team within Alexa division to explore ways of making the device more useful in healthcare. The healthcare team, dubbed "health & wellness," is exploring disease management, aging and care for mothers and infants.

Amazon Business (B2B marketplace), shelves plan to become pharmaceutical supplier to hospitals and clinics. Amazon to focus on beefing up less sensitive medical supply offerings to smaller hospitals and clinics.

Former FDA Chief Health Informatics Officer Taha Kasshout joins Amazon’s 1492 as head of business development for healthcare products.

Amazon hires more than 20 employees, including software engineers, data analysts and business strategists with years of experience in healthcare or pharmaceutical industries from companies such as CVS, Express Scripts and UnitedHealth.

March 9, 2018 March 19, 2017 April 16, 2018 May 11, 2018 June 6, 2018

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Amazon’s Healthcare Timeline | 2018 (cont.)

Amazon considers opening primary care clinics for its employees at its headquarters in Seattle. The tentative plan is to hire a small number of physicians to start a pilot clinic later in 2018.

Amazon is rumored to be in talks to invest in an Indian pharmacy chain, known as MedPlus. MedPlus operates more than 1,400 pharmacies across India. The pharmacy chain also operates an online pharmacy store called MedPlusMart, several lab testing centers and a surgical equipment distribution business.

CNBC reports Amazon is in talks with Xealth, a digital prescribing and analytics platform, and two health systems about a pilot project. The project would enable physicians to recommend medical product bundles to their patients at the hospital with products delivered to the patients' homes upon discharge.

Amazon enters into an agreement to acquire online pharmacy startup PillPack for ~$1 billion. PillPack is a full-service pharmacy that manages prescription medications for its customers by packaging, organizing and delivering the medications.

Atul Gawande (Brigham and Women's Hospital) hired as CEO of the Amazon, Berkshire Hathaway and JP Morgan joint venture.

June 20, 2018 June 28, 2018 July 12, 2018 July 19, 2018 August 10, 2018

STAT reports that the healthcare venture formed by Amazon, Berkshire Hathaway and JPMorgan has selected the Monitor Group to help drive improvements in the care of chronically ill patients.

Change Healthcare and Amazon team up to launch a new cloud-based claims and payments network for payers and providers. The network will be available on Amazon Web Services and will deploy technologies like blockchain.

Accenture and Merck announce they are partnering with Amazon to launch a data-driven drug development platform on Amazon Web Services.

Jack Stoddard, formerly of Optum, hired as COO of the Amazon, Berkshire Hathaway and JPMorgan joint venture.

Maulik Majmudar (Massachusetts General Hospital cardiologist) tweets that he has decided to join Amazon's team.

August 20, 2018 September 4, 2018 September 17, 2018 September 18, 2018 September 20, 2018


UnitedHealth Group announces lawsuit against Amazon and former executive David William Smith for stealing trade secrets and taking them to an alleged competitor.

CNBC reports Amazon will team up with Omron Healthcare to create a blood pressure skill for Alexa.

Amazon Web Services adds three HIPPA-eligible machine learning tools to its pipeline of services.

Partners with Aurohealth, to launch a fourth OTC brand, “Primary Health”. The health brand has four products: generic versions of Mucinex DM, Nexium and Prilosec.

Partners with health brand consultancy Arcadia Group to sell an exclusive new brand (Choice) of consumer-focused medical devices, including blood pressure cuffs and glucose monitors.

Amazon files a patent Alexa, which aims to detect when a user is sick. The device would then help sell users medications.

News breaks that Amazon and Google both invested in Aiva, a startup that uses smart speakers to connect patients and seniors with their healthcare providers.

Officially picks the winners for its second headquarters, opting to split it between Long Island, NY and Crystal City, VA.

Amazon’s Healthcare Timeline | 2018 – Present

September 28, 2018 October 9, 2018 October 26, 2018 November 7, 2018 November 8, 2018

Announces plans to sell software, known as Amazon Comprehend Medical, used to mine patient health records for data to help physicians improve treatment plans and to help hospitals cut costs.

Accenture, Merck and AWS open data-driven drug development platform to software vendors.

CNBC reports Amazon will soon allow its employees to test PillPack.

Amazon / Berkshire Hathaway / JPMorgan hires Dana Safran, the former chief performance measurement and improvement officer at Blue Cross Blue Shield of Massachusetts.

November 19, 2018 November 21, 2018 November 26, 2018 November 27, 2018

November 13, 2018

December 12, 2018 January 23, 2019

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CVS Health | Woonsocket, RI


CommentaryCommentary

Announced $69B acquisition of Aetna on 12/3/17 (closed 11/28/18)

o Combined company to have revenue of $238B and EBITDA of $18B

o Creates a vertically integrated healthcare platform with high-touch connectivity to consumers though CVS’s 9,800 retail locations and 1,100 MinuteClinics becoming the “front door to health care”

Platform to “revolutionize the consumer healthcare experience while lowering cost of care”

o Aetna to remain a separate unit within the combined company but provides access to Aetna’s 22M covered lives

Caremark is the largest PBM with $160B in revenues and ~1.9B adjusted scripts

o Cigna’s ESRX and United’s OptumRX have $103B and $69B in revenue, respectively with each having ~1.3B adjusted scripts

Stock Price $65.01% of 52-Week High 79%






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Walgreens | Deerfield, IL



Walgreens has focused on partnerships rather than large scale M&A as a means of expanding its consumer reach and refining itsapproach to Amazon

o WSJ reported on 2/12/18 that Walgreens was in talks with AmerisourceBergen (~$18B market cap) about acquiring the remaining 74% that it doesn’t currently own with talks reportedly ending weeks later

o Announced partnership with United/Optum on 2/15/18 to put 15 MedExpress urgent care centers adjacent to Walgreens

o Announced a partnership with Humana on 6/19/18 to operate “senior-focused primary care clinics” inside drugstores

WSJ reported on 11/21/18 that Walgreens and Humana were in talks to purchase mutual equity stakes

Humana still looking to expand Walmart relationship as well

o Expanded LabCorp partnership on 10/28/18 to integrate 600 patient service centers in Walgreens over next 4 years (expansion of 7-store pilot program from 6/28/17)

Noted potential future benefit in clinical research and data integration

o Walgreens and Kroger announced on 12/4/18 a 13-store pilot to roll out Kroger Express branded organic items and meal kits


Equity Value $66,154Plus: Debt 15,992Less: Cash 980





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Pharmacy and Clinic Locations

CompanyCompany PharmaciesPharmacies ClinicsClinics

CVS Health 9,800 1,100

Walgreens 9,560 400

Walmart 4,600 88

Rite Aid 2,526 -

Kroger 2,200 217


• Walgreens / Rite Aid $17.2B merger announced on October 27, 2015; terminated over antitrust issues on June 29, 2017

o Walgreens ultimately acquired 1,932 locations for $4.4B

• Albertsons / Rite Aid merger announced on February 20, 2018; terminated on August 9, 2018 over relative valuation differences

o The combined company would have been worth ~$24B in market capitalization


Cash Pay Drug Prices

- $50 $100 $150 $200 $250 $300

HealthWarehouse.com

Costco

Independents

Sam's Club

Walmart

Kmart

Grocery Stores

Walgreens

Rite Aid

CVS / Target

Plavix Lipitor Cymbalta Celebrex Actos

Average Price Across Retailers

Actos – $116

Celebrex – $128

Cymbalta – $114

Lipitor – $48

Plavix – $51

An April 2018 survey published by Consumer Reports demonstrates the wide range of prices for a one month supply of a common basket of prescription drugs and shows that the least expensive option for consumers may ultimately be paying cash rather than using insurance.

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Cigna | Bloomfield, CT



Announced $67B acquisition of Express Scripts on 3/8/18 in order to provide the following:

o Expanded Consumer Choice – provides a full suite of medical, behavioral, specialty pharmacy and health engagement services accessible across retail

and online distribution channels

o Patient‐Provider Alignment – more coordinated approach to an individual’s health care, reducing complexity and creating better outcomes

o Personalized Value – simplifies consumer experience through actionable insights, predictive analytics, adoption of evidence‐based care and

innovation and medical technology to support care decisions

Acquisition follows blocked mergers of Cigna/Anthem and Aetna/Humana in 2017

o Also follows Anthem’s announcement on 10/18/17 that it would create its own PBM known as IngenioRX following the end of its contract with

Express Scripts on 12/31/19

Anthem accused Express Scripts of ~$3B in annual overcharges relating to discounts and filed suit for $15B

Anthem accounts for ~$20B of Express Scripts’ ~$100B in revenues annually

Announced acceleration of IngenioRX moving some clients to IngenioRX in Q2 on 1/30/19







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Sharing the Wealth

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Participant Economics in the US Drug Supply Chain

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Pharmacies

Insurers

Distributors

PBMs

Conversion of Gross Profits into EBITDAConversion of Gross Profits into EBITDA


LabCorp & Quest

Public Market Overview - LabCorpPublic Market Overview - LabCorp Relative Stock Price PerformanceRelative Stock Price Performance


Beginning on 1/1/19 both LabCorp and Quest became in-network labs for both United and Aetna, ending previous exclusivity agreements (Quest/Aetna, LabCorp/United)o Allows insurers to begin shifting the focus of lab testing away from volume driven fee-for-service systemo Through value-based programs, lab services will be focused on quality and patient outcomes, enhancing the patient experience and controlling costs for insurers

Headwinds associated with PAMA implementation likely to persist for several years given multi-year phase in o 24 of top 25 codes on CLFS will be cut with 18 of top 25 cut over 30%

LabCorp and Quest currently account for ~25% of total diagnostic testing by dollar and ~45% by volumeo Consolidation likely to continue

Quest and LabCorp have executed on divergent strategies in recent years o Quest focused primarily on growing share though partnering/acquiring hospital outreach labs

Responsible for 14 of last 23 announced lab partnerships/acquisitions 5 for Quest and 4 for Sonic

o LabCorp has diversified its revenue base through acquisitions of Covance, Chiltern, Sequenom and other expanded partnerships

Public Market Overview - QuestPublic Market Overview - Quest

Laboratory-based diagnostic testing is an integral part of patient-centered healthcare, while lab services only account for ~3% of overall healthcare spending and ~1.4% of Medicare spending, ~70% of healthcare spending is dependent on lab results.












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Broad deflationary environment for generic drugs (~2/3 of distributor profits) coupled with the current administration’s focus on branded drug pricing presents additional headwinds above Amazon/PillPack implications.

Cardinal, McKesson & Amerisource

CardinalCardinal McKessonMcKesson AmerisourceAmerisource

Operates in two segments, Pharmaceutical and Medical (12% of revenues)

o Medical segment provides a broad range of national brand products and supply chain services to hospitals, ASCs and clinical labs

Focused on vertically integrating within the distribution business by acquiring product manufacturing assets

o Acquired Cordis (cardiology and endovascular devices) from J&J for $1.9B on 10/2/15

o Acquired Patient Care, Deep Vein Thrombosis and Nutritional Insufficiency businesses from Medtronic for $6.1B on 4/18/17

Highlighted 3 key growth initiatives for the future at its 2018 Analyst Day

o Manufacturer value proposition – data and analytics to help bring drugs to market through R&D support and life cycle/commercialization

o Specialty pharmaceuticals – cited investments in US Oncology and RxCrossroads as ways to help manufacturers bring complex drugs to the market

o Acquired CoverMyMeds (automated prior authorization software) for $1.1B on 1/26/17

o Acquired Medical Specialties Distributors (home infusion, specialty pharmacy, and oncology market products) for $800M on 4/25/18

o Role of retail pharmacy - bringing the pharmacist to the center of care while providing solutions for independent pharmacies to better participate and ease administrative burdens

o ~4,900 Health Mart locations and 6,600 pharmacies in Health Mart Atlas PSAO

Continued headwinds associated with PharMEDium Healthcare (compounded sterile preparations to acute care hospitals) which was essentially closed during 2018 due to FDA CGMP inspection deficiencies

o Business under a full review with option to commit more resources or move towards a full sale of the business

Walgreens and Express Scripts account for ~33% and ~13% of revenues, respectively

Stock Price % Delta vs. Amazon*: (89.3%) Stock Price % Delta vs. Amazon*: (82.0%) Stock Price % Delta vs. Amazon*: (68.9%)

* Calculated according to difference in % change in stock price from 1/1/2017 – 2/8/2019

BIRMINGHAM2204 Lakeshore Drive, Suite 425

Birmingham, AL 35209-8855Phone: 205.949.2043

DALLAS180 State Street, Suite 225

Southlake, TX 76092Phone: 214.295.1055

In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M&A Securities Group, Inc. or Founders M&A Advisory, LLC, both members FINRA & SiPC. Founders M&A Advisory is a wholly owned subsidiary of Founders.

HOUSTON24275 Katy Freeway, Suite 400

Katy, TX 77494Phone: 713.412.0313

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Documents

Amazon’s Impact on Healthcare M&A › amo_hub_content...payments network for payers and providers. The network will be available on Amazon Web Services and will deploy technologies