NEW YORK (Fortune) -- At the bipartisan health-care summit scheduled for February 25th, President Obama is pledging to champion the voluminous bills passed by the House and Senate as the foundation for reforming the $2.2 trillion medical marketplace.
But each piece of legislation comes with a deadly expectation that could cost taxpayers dearly: the benevolence of corporate America.
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"Many people say Americans will like the bills once they pass," says Edmund Haislmaier of the conservative Heritage Foundation. "But what they're more likely to get is a surprise in the form of hundreds of billions a year in extra spending."
That surprise comes from an assumption made by the Congressional Budget Office: that few employers will drop their plans even when the government offers generous subsidies and imposes penalties that are absurdly low.
Both the House and Senate measures lay out the subsidies that the federal government is obligated to grant lower-income and middle-class health-care consumers when the plans would go into effect in 2014. It's a big contractual entitlement, but it's likely cost is vastly understated.
Let's examine the size of the subsidies. The House and Senate bills both set caps on the percentage of income Americans pay for premiums. They also subsidize the out-of-pocket costs of deductibles and co-pays.
Since the plans are quite similar, we'll use the one in the House legislation. For a family of four, the bill puts a limit of between 3% and 12% of income from $20,500 to $82,000 a year on a sliding scale. The lower a family's income, the higher the share paid by the taxpayer.
For a household in the middle of America's income spectrum, earning $61,500, the CBO reckons that the average yearly premiums and out-of-pocket costs for a family policy will reach $20,500 by 2016. When the plans are fully implemented, the family is obligated to cover $10,500, and the government pays the balance of $10,000. For a family making around $40,000 the government contributes even more -- around $19,000.
The CBO projects that these subsidies will cost $93 billion in 2016. But that assumes that just 29 million Americans collect them, and that the number of people covered by their employers actually increases. And that number is likely to decrease sharply.
0:00 /4:44Health care costs will go up
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Why? Here's where the fatal flaw comes in. Companies that drop their plans face relatively minor penalties under the provision that's won the most Congressional support, an annual fine of $750 per worker.
Most big industrial companies are already paying around $15,000 per family in health-care costs. Hence, they could shoulder the fine and reduce their costs by 95%, simply by dumping their workers into the subsidy pools the plans mandate.
Using the CBO numbers, the government's subsidy per person comes to $3,200 in 2016. Say just half of all employers cancel their plans, throwing 80 million Americans into the pools. That would cost an extra $256 billion.
But those workers would presumably get raises, since in a free labor market employers are likely to put what they now pay for health care into paychecks. The government would collect extra income and payroll taxes, as well as the yearly fine of $750. All told, the extra revenue from taxes and the penalty would harvest around $100 billion to partly offset the additional subsidies -- but only partly.
So the net extra cost would be $156 billion ($256 billion minus $100 billion). Meanwhile the total spending on subsidies would soar from the projected $93 billion to almost $250 billion, an increase of 170%. That's the $93 billion the CBO is already predicting, plus the additional $156 billion from the tens of millions of employees who would lose their corporate plans and receive subsidies instead.
The $250 billion represents a permanent, structural spending increase of 1% of GDP, and it's headed higher from there. Message to taxpayers
My Visitors
Tuesday, February 23, 2010
California solar project gets $1.4 bln US guarantee
SAN FRANCISCO/WASHINGTON (Reuters) - The United States Monday gave its biggest backing yet to a renewable energy project, guaranteeing $1.37 billion in loans for a California development by BrightSource Energy Inc that uses the sun's heat to power a steam turbine.
BrightSource's proposed solar thermal plants are expected to generate about 400 megawatts of electricity and power about 140,000 California homes, giving it the heft to compete with plants fueled by coal and natural gas.
President Barack Obama's administration has touted green energy investments as a way to create jobs and increase international economic competitiveness.
"We're not going to sit on the sidelines while other countries capture the jobs of the future -- we're committed to becoming the global leader in the clean energy economy," Energy Secretary Steven Chu said in a statement.
The sector has seen projects being launched and agreements being signed with utilities, who count on solar thermal to meet California clean energy goals, but construction has yet to start on a large scale for the solar thermal industry.
Financing of projects has been a big challenge with the tightening of the credit markets as capital requirements of these green energy companies are very large.
Solar thermal technology is different from its better-known rival, rooftop photovoltaic. Solar thermal companies like BrightSource and rivals Abengoa Solar, eSolar Inc have technology that uses the sun's rays, reflected by thousands of small mirrors, to heat liquids to create steam in turbines and generate electricity.
The conditional loan guarantees from the U.S. Department of Energy, the largest federal loan commitment offered to a renewable energy firm, would help BrightSource build three utility-scale solar thermal plants for its Ivanpah project, which will be located on federally-owned land in the Mojave Desert in southeastern California.
"It's a good beginning for the industry," BrightSource CEO John Woolard said in an interview. "It really allows Ivanpah to be the first (solar thermal) project to be constructed in almost 20 years now" in California.
California, and other parts of the world, are betting heavily on solar thermal. About a quarter of the clean energy contracts approved in 2009 in California by capacity was solar thermal, according to the Public Utilities Commission.
Construction on the first Ivanpah plant is expected to begin during the second half of this year, with commercial operations beginning in 2012.
All three plants are expected be on line by 2014.
The loan guarantee is conditioned on BrightSource meeting financial and environmental requirements, including local, state and federal regulatory approvals.
BrightSource has run into trouble from environmental groups who are concerned that the construction would harm desert plants and wildlife, including the desert tortoise.
The company earlier this month agreed to reduce the footprint for the Ivanpah project to minimize the environmental impact.
TO RAISE EQUITY FINANCING
The company, which counts search giant Google and Silicon Valley fund VantagePoint Venture Partners among its investors, already has contracts to deliver more than 2,600 megawatts of power to California utilities PG&E Corp (PG&E) and Edison International's Southern California Edison (SCE).
PG&E will purchase approximately two-thirds of the power generated at Ivanpah and SCE will purchase approximately one-third.
Woolard said that the key value of federal loan guarantees is that it helps strong renewable energy projects get financed, especially since the credit markets have yet to reach normal levels of activity.
It "replaces or helps shore up that component," he said.
Woolard did not reveal the total funding needed for the project but said the company would be raising equity financing from sources such as private investors, energy companies and investment funds.
"There is an equity commitment," Woolard said. "We will be going out to raise equity (financing) in the next four to six months. So that will be the next step in the process."
The loan guarantee is the sixth such offer to renewable energy companies by the Obama administration, which has touted green energy investments as a way to create jobs and increase international economic competitiveness.
Under the program, the Department of Energy issues a conditional commitment to guarantee loans to be provided by the U.S. Treasury's Federal Financing Bank. (Additional reporting by Tom Doggett; Editing by Peter Henderson and Marguerita Choy)
BrightSource's proposed solar thermal plants are expected to generate about 400 megawatts of electricity and power about 140,000 California homes, giving it the heft to compete with plants fueled by coal and natural gas.
President Barack Obama's administration has touted green energy investments as a way to create jobs and increase international economic competitiveness.
"We're not going to sit on the sidelines while other countries capture the jobs of the future -- we're committed to becoming the global leader in the clean energy economy," Energy Secretary Steven Chu said in a statement.
The sector has seen projects being launched and agreements being signed with utilities, who count on solar thermal to meet California clean energy goals, but construction has yet to start on a large scale for the solar thermal industry.
Financing of projects has been a big challenge with the tightening of the credit markets as capital requirements of these green energy companies are very large.
Solar thermal technology is different from its better-known rival, rooftop photovoltaic. Solar thermal companies like BrightSource and rivals Abengoa Solar, eSolar Inc have technology that uses the sun's rays, reflected by thousands of small mirrors, to heat liquids to create steam in turbines and generate electricity.
The conditional loan guarantees from the U.S. Department of Energy, the largest federal loan commitment offered to a renewable energy firm, would help BrightSource build three utility-scale solar thermal plants for its Ivanpah project, which will be located on federally-owned land in the Mojave Desert in southeastern California.
"It's a good beginning for the industry," BrightSource CEO John Woolard said in an interview. "It really allows Ivanpah to be the first (solar thermal) project to be constructed in almost 20 years now" in California.
California, and other parts of the world, are betting heavily on solar thermal. About a quarter of the clean energy contracts approved in 2009 in California by capacity was solar thermal, according to the Public Utilities Commission.
Construction on the first Ivanpah plant is expected to begin during the second half of this year, with commercial operations beginning in 2012.
All three plants are expected be on line by 2014.
The loan guarantee is conditioned on BrightSource meeting financial and environmental requirements, including local, state and federal regulatory approvals.
BrightSource has run into trouble from environmental groups who are concerned that the construction would harm desert plants and wildlife, including the desert tortoise.
The company earlier this month agreed to reduce the footprint for the Ivanpah project to minimize the environmental impact.
TO RAISE EQUITY FINANCING
The company, which counts search giant Google and Silicon Valley fund VantagePoint Venture Partners among its investors, already has contracts to deliver more than 2,600 megawatts of power to California utilities PG&E Corp (PG&E) and Edison International's Southern California Edison (SCE).
PG&E will purchase approximately two-thirds of the power generated at Ivanpah and SCE will purchase approximately one-third.
Woolard said that the key value of federal loan guarantees is that it helps strong renewable energy projects get financed, especially since the credit markets have yet to reach normal levels of activity.
It "replaces or helps shore up that component," he said.
Woolard did not reveal the total funding needed for the project but said the company would be raising equity financing from sources such as private investors, energy companies and investment funds.
"There is an equity commitment," Woolard said. "We will be going out to raise equity (financing) in the next four to six months. So that will be the next step in the process."
The loan guarantee is the sixth such offer to renewable energy companies by the Obama administration, which has touted green energy investments as a way to create jobs and increase international economic competitiveness.
Under the program, the Department of Energy issues a conditional commitment to guarantee loans to be provided by the U.S. Treasury's Federal Financing Bank. (Additional reporting by Tom Doggett; Editing by Peter Henderson and Marguerita Choy)
California health insurer draws hail of charges
LOS ANGELES (Reuters) - A review of 3,000 consumer complaints against Anthem Blue Cross, California's largest for-profit health insurer, has found over 700 violations of state law during the past four years, state regulators said on Monday.
The investigation into claims-handling practices by Anthem, a unit of WellPoint Inc, comes as the company fends off sharp criticism from the Obama administration for its plans to raise premiums for some individuals by up to 39 percent.
On a third front, lawyers delivered opening statements in the Los Angeles trial of a breach-of-contract suit brought against Anthem by a man who claims the insurance company wrongfully denied coverage for a life-saving liver transplant.
Anthem was singled out for review by California Insurance Commissioner Steve Poizner, who is seeking the Republican nomination for governor this year, on the basis of a large number of consumer complaints, spokesman Darrel Ng said.
"We understand that when you handle thousands of claims, human error is a factor. But it looks like that there may be something else going on, which is why we started the enforcement action," Ng said.
The 700-plus violations cited by regulators were submitted to an administrative law judge for further review and possible sanctions. The company faces fines of up to $10,000 for each violation, or more than $7 million if all cases were proven.
The lion's share involved a failure to pay claims within 30 days, or to respond quickly enough to regulators investigating consumer complains, Poizner's office said.
COMPANY 'TAKES ISSUES VERY SERIOUSLY'
Regulators said they also found dozens of instances in which the company misrepresented policy provisions or offered "unreasonably low settlement offers."
"We take the issues raised ... very seriously," WellPoint said in a statement, adding that the review "represents a small fraction" of the "many millions" of claims it handles each year. "We look forward to receiving the specifics from the investigation and to ... resolve these issues."
Anthem agreed earlier this month to delay its planned premium hikes until May after Poizner retained an outside actuary to examine the company's rates. Competitors such as Blue Shield of California and Aetna also have raised premiums significantly in recent years, Ng said.
The administration and congressional Democrats have seized on Anthem's proposed premium hikes as part of their strategy to boost support for an overhaul of the U.S. healthcare system. Top WellPoint executives have been called to testify on Wednesday on Capitol Hill.
Indianapolis, Indiana-based WellPoint, the largest U.S. health insurer by membership, has said Anthem's planned premium increases in California are in line with its rivals, reflecting soaring medical costs and an exodus of healthy consumers from its ranks.
In the breach-of-contract case going to trial this week, a lawyer for liver transplant patient Ephram Nehme, 62, told a Los Angeles Superior Court jury that his client was forced to go out of his coverage network, and out of state to Indiana, for his surgery because his illness had rapidly progressed.
Anthem lawyers have said the company was under no obligation to reimburse Nehme for the $205,000 cost of his surgery because he went out of network after the transplant had been approved at an in-network Los Angeles hospital.
But Nehme's lawyer, Scott Glovsky, said his Los Angeles doctors recommended that he go to Indiana because he risked waiting too long if he stayed in California. He said Anthem denied authorization of the Indiana surgery without conducting an inquiry or talking to any of Nehme's physicians. (Editing by Dan Whitcomb and Eric Walsh
The investigation into claims-handling practices by Anthem, a unit of WellPoint Inc, comes as the company fends off sharp criticism from the Obama administration for its plans to raise premiums for some individuals by up to 39 percent.
On a third front, lawyers delivered opening statements in the Los Angeles trial of a breach-of-contract suit brought against Anthem by a man who claims the insurance company wrongfully denied coverage for a life-saving liver transplant.
Anthem was singled out for review by California Insurance Commissioner Steve Poizner, who is seeking the Republican nomination for governor this year, on the basis of a large number of consumer complaints, spokesman Darrel Ng said.
"We understand that when you handle thousands of claims, human error is a factor. But it looks like that there may be something else going on, which is why we started the enforcement action," Ng said.
The 700-plus violations cited by regulators were submitted to an administrative law judge for further review and possible sanctions. The company faces fines of up to $10,000 for each violation, or more than $7 million if all cases were proven.
The lion's share involved a failure to pay claims within 30 days, or to respond quickly enough to regulators investigating consumer complains, Poizner's office said.
COMPANY 'TAKES ISSUES VERY SERIOUSLY'
Regulators said they also found dozens of instances in which the company misrepresented policy provisions or offered "unreasonably low settlement offers."
"We take the issues raised ... very seriously," WellPoint said in a statement, adding that the review "represents a small fraction" of the "many millions" of claims it handles each year. "We look forward to receiving the specifics from the investigation and to ... resolve these issues."
Anthem agreed earlier this month to delay its planned premium hikes until May after Poizner retained an outside actuary to examine the company's rates. Competitors such as Blue Shield of California and Aetna also have raised premiums significantly in recent years, Ng said.
The administration and congressional Democrats have seized on Anthem's proposed premium hikes as part of their strategy to boost support for an overhaul of the U.S. healthcare system. Top WellPoint executives have been called to testify on Wednesday on Capitol Hill.
Indianapolis, Indiana-based WellPoint, the largest U.S. health insurer by membership, has said Anthem's planned premium increases in California are in line with its rivals, reflecting soaring medical costs and an exodus of healthy consumers from its ranks.
In the breach-of-contract case going to trial this week, a lawyer for liver transplant patient Ephram Nehme, 62, told a Los Angeles Superior Court jury that his client was forced to go out of his coverage network, and out of state to Indiana, for his surgery because his illness had rapidly progressed.
Anthem lawyers have said the company was under no obligation to reimburse Nehme for the $205,000 cost of his surgery because he went out of network after the transplant had been approved at an in-network Los Angeles hospital.
But Nehme's lawyer, Scott Glovsky, said his Los Angeles doctors recommended that he go to Indiana because he risked waiting too long if he stayed in California. He said Anthem denied authorization of the Indiana surgery without conducting an inquiry or talking to any of Nehme's physicians. (Editing by Dan Whitcomb and Eric Walsh
Reuters Summit-WRAPUP 1-Online travel bookings shift overseas
NEW YORK (Reuters) - Growth in online travel bookings is rapidly shifting overseas, leading to a race to bolster operations in Asia and Latin America, the chief executives of two top online travel companies said Monday.
Speaking at the Reuters Travel and Leisure Summit, Dara Khosrowshahi of Expedia Inc and Jeffery Boyd of Priceline.com agreed that overseas growth is fundamental to their business strategies.
Khosrowshahi, the 40-year-old leader of the largest U.S. online travel agency, said he expects non-U.S. bookings to account for at least half of Expedia's business within five years, up from 37 percent currently.
"Europe is a great market for us. And for us, the Asia-Pacific and Latin American markets are new emerging markets," he said.
The value of the company's bookings rose 26 percent year-over-year in the fourth quarter of 2009. International bookings increased 38 percent. Domestic bookings increased 19 percent.
Asia-Pacific and Latin American markets account for about 5 percent of the total value of Expedia's bookings, but the company hopes to double that in the next couple of years, Khosrowshahi said.
"We're aggressively investing in China and Australia, India and Brazil," he said.
His rival, Boyd, 53, said about two-thirds of Priceline's bookings are non-U.S.
Priceline, which made its name with its name-your-own-price auction, saw gross bookings growth of 52.9 percent year-over-year in the fourth quarter.
International bookings were up 81 percent. Domestic bookings grew 20.6 percent.
"The international markets are less mature. The online market is less well-developed. Competition is not as far ahead as it is here in the United States," Boyd said.
He also noted that the hotel business is more fragmented in international markets.
"We expect to have higher growth in the international markets, from new markets like Asia that are less well-penetrated and are currently enjoying higher levels of economic growth," Boyd said.
REBOUNDING BUSINESS TRAVEL
Corporate travel demand is up after a painful recession, but companies likely will curb travel expenses and steer employees away from costly first-class accommodation, Khosrowshahi said.
"The phones are ringing again, from what the partners tell us," he said. "Again, it is off of a very low base, but we do see some encouraging signs from our hotel partners."
He said that while demand is improving, U.S. companies remain conservative in their travel spending and are adhering more closely to internal travel policies that may have been neglected in recent years.
The travel industry has been hit in the past year by an economic downturn that eroded travel demand. Travel companies responded by slashing fees and offering promotions to bolster bookings.
Boyd said the online travel business was recovering from a recession that saw the erosion of travel demand.
"We probably have seen the beginning of a recovery in business travel already, at least according to what the hotels are saying," he said.
Speaking at the Reuters Travel and Leisure Summit, Dara Khosrowshahi of Expedia Inc and Jeffery Boyd of Priceline.com agreed that overseas growth is fundamental to their business strategies.
Khosrowshahi, the 40-year-old leader of the largest U.S. online travel agency, said he expects non-U.S. bookings to account for at least half of Expedia's business within five years, up from 37 percent currently.
"Europe is a great market for us. And for us, the Asia-Pacific and Latin American markets are new emerging markets," he said.
The value of the company's bookings rose 26 percent year-over-year in the fourth quarter of 2009. International bookings increased 38 percent. Domestic bookings increased 19 percent.
Asia-Pacific and Latin American markets account for about 5 percent of the total value of Expedia's bookings, but the company hopes to double that in the next couple of years, Khosrowshahi said.
"We're aggressively investing in China and Australia, India and Brazil," he said.
His rival, Boyd, 53, said about two-thirds of Priceline's bookings are non-U.S.
Priceline, which made its name with its name-your-own-price auction, saw gross bookings growth of 52.9 percent year-over-year in the fourth quarter.
International bookings were up 81 percent. Domestic bookings grew 20.6 percent.
"The international markets are less mature. The online market is less well-developed. Competition is not as far ahead as it is here in the United States," Boyd said.
He also noted that the hotel business is more fragmented in international markets.
"We expect to have higher growth in the international markets, from new markets like Asia that are less well-penetrated and are currently enjoying higher levels of economic growth," Boyd said.
REBOUNDING BUSINESS TRAVEL
Corporate travel demand is up after a painful recession, but companies likely will curb travel expenses and steer employees away from costly first-class accommodation, Khosrowshahi said.
"The phones are ringing again, from what the partners tell us," he said. "Again, it is off of a very low base, but we do see some encouraging signs from our hotel partners."
He said that while demand is improving, U.S. companies remain conservative in their travel spending and are adhering more closely to internal travel policies that may have been neglected in recent years.
The travel industry has been hit in the past year by an economic downturn that eroded travel demand. Travel companies responded by slashing fees and offering promotions to bolster bookings.
Boyd said the online travel business was recovering from a recession that saw the erosion of travel demand.
"We probably have seen the beginning of a recovery in business travel already, at least according to what the hotels are saying," he said.
Schlumberger sees gas drill growth in Smith deal
SAN FRANCISCO (Reuters) - Oilfield services leader Schlumberger Ltd aims to gain market share in shale gas drilling with its purchase of rival Smith International Inc , and expects few antitrust hurdles for the takeover.
Investors' belief in the deal's potential gained traction on Monday, with Smith shares extending their early gains and closing 8.8 percent higher at $41.03. Schlumberger trimmed its early losses and closed 3.7 percent lower at $61.57.
On a conference call with analysts Monday, Schlumberger Chief Executive Andrew Gould said he had been considering the acquisition "for some time," and the timing now was right, even though he acknowledged paying "a significant premium."
The stock market had shaved about $700 million off the original $11.3 billion value as of Monday's close.
But analysts welcomed Gould's move to get his hands on Smith's drillbit technology, in which the company made its name when it was founded 108 years ago in California's oil boom.
"The bits is a really cool business, and Smith is the best at that," said Doug Sheridan of EnergyPoint Research Inc.
Under the terms, Smith shareholders will receive 0.6966 shares of Schlumberger for each of theirs.
That originally valued Smith at a 37.5 percent premium over Thursday's closing share price, according to a joint statement by the companies on Sunday. They expect the deal, subject to shareholder and regulatory approval, to close this year.
Schlumberger expects the acquisition to add to earnings per share in 2012, after realizing pretax savings after costs of about $160 million in 2011, and double that the next year.
Schlumberger said later on Monday that in the event of a deal termination, Smith may have to pay a fee of $340 million.
Big oil services players, which also include Halliburton Co and Baker Hughes Inc, say clients, and state-run oil companies in particular, increasingly demand more services from a single provider.
So Schlumberger, operating in about 80 countries, wants Smith drillbits to give clients the option to drill deeper and cheaper for fossil fuels, and has its eyes on the fast-growing market for extracting natural gas from shale rock.
"No doubt, in the long-term, shale gas is going to be one of the big new energy sources in the U.S. and overseas," Gould said, "and the capacity to serve that market in North America is of great interest to me."
Gould does not believe antitrust issues will cause any "change in the landscape" of the acquisition.
Analysts say the deal is likely to face close scrutiny by antitrust enforcers given the attention paid to other oilfield services mergers, such as Cameron International Corp's NATCO purchase and the $6 billion purchase of BJ Services by Baker Hughes, which is due to close this quarter.
Many anticipated a sale of Smith's PathFinder business, which logs data while drilling, and UBS analyst Angie Sedita put its price tag at $600 million to $700 million.
Tudor, Pickering Holt expects Schlumberger to jettison many of the assets Smith acquired when it forked out $2.7 billion for W-H Energy at the peak of the oil market boom in mid-2008.
Barry Nigro, an antitrust expert at law firm Fried Frank, noted that oilfield services had already undergone a fair amount of consolidation, and the head of the DOJ's antitrust division had said she intends to focus on the energy industry.
"So I think it's an area that is likely going to get a closer look than usual," he said, though the real question was how long the review would take and what would have to be sold.
A decade ago, a U.S. court fined Schlumberger and Smith for violating a 1994 consent decree to keep their drilling fluid arms separate, but analysts say that case settled the problem.
Smith CEO John Yearwood will be very familiar with any issues surrounding their M-I SWACO drilling joint venture, of which Smith owns 60 percent, having been a Schlumberger representative on its management committee.
Both he and Smith Chief Financial Officer William Restrepo worked at Schlumberger for two decades, with Yearwood's final two years spent as senior adviser to Gould.
EnergyPoint's Sheridan, like many analysts, expects Smith's low-margin Wilson Supply business to be sold eventually. (Reporting by Ernest Scheyder and Steve James in New York, and Braden Reddall in San Francisco; Additional reporting by Diane Bartz in Washington; Editing by Lisa Von Ahn, Tim Dobbyn, Bernard Orr, Phil Berlowitz)
Investors' belief in the deal's potential gained traction on Monday, with Smith shares extending their early gains and closing 8.8 percent higher at $41.03. Schlumberger trimmed its early losses and closed 3.7 percent lower at $61.57.
On a conference call with analysts Monday, Schlumberger Chief Executive Andrew Gould said he had been considering the acquisition "for some time," and the timing now was right, even though he acknowledged paying "a significant premium."
The stock market had shaved about $700 million off the original $11.3 billion value as of Monday's close.
But analysts welcomed Gould's move to get his hands on Smith's drillbit technology, in which the company made its name when it was founded 108 years ago in California's oil boom.
"The bits is a really cool business, and Smith is the best at that," said Doug Sheridan of EnergyPoint Research Inc.
Under the terms, Smith shareholders will receive 0.6966 shares of Schlumberger for each of theirs.
That originally valued Smith at a 37.5 percent premium over Thursday's closing share price, according to a joint statement by the companies on Sunday. They expect the deal, subject to shareholder and regulatory approval, to close this year.
Schlumberger expects the acquisition to add to earnings per share in 2012, after realizing pretax savings after costs of about $160 million in 2011, and double that the next year.
Schlumberger said later on Monday that in the event of a deal termination, Smith may have to pay a fee of $340 million.
Big oil services players, which also include Halliburton Co and Baker Hughes Inc, say clients, and state-run oil companies in particular, increasingly demand more services from a single provider.
So Schlumberger, operating in about 80 countries, wants Smith drillbits to give clients the option to drill deeper and cheaper for fossil fuels, and has its eyes on the fast-growing market for extracting natural gas from shale rock.
"No doubt, in the long-term, shale gas is going to be one of the big new energy sources in the U.S. and overseas," Gould said, "and the capacity to serve that market in North America is of great interest to me."
Gould does not believe antitrust issues will cause any "change in the landscape" of the acquisition.
Analysts say the deal is likely to face close scrutiny by antitrust enforcers given the attention paid to other oilfield services mergers, such as Cameron International Corp's NATCO purchase and the $6 billion purchase of BJ Services by Baker Hughes, which is due to close this quarter.
Many anticipated a sale of Smith's PathFinder business, which logs data while drilling, and UBS analyst Angie Sedita put its price tag at $600 million to $700 million.
Tudor, Pickering Holt expects Schlumberger to jettison many of the assets Smith acquired when it forked out $2.7 billion for W-H Energy at the peak of the oil market boom in mid-2008.
Barry Nigro, an antitrust expert at law firm Fried Frank, noted that oilfield services had already undergone a fair amount of consolidation, and the head of the DOJ's antitrust division had said she intends to focus on the energy industry.
"So I think it's an area that is likely going to get a closer look than usual," he said, though the real question was how long the review would take and what would have to be sold.
A decade ago, a U.S. court fined Schlumberger and Smith for violating a 1994 consent decree to keep their drilling fluid arms separate, but analysts say that case settled the problem.
Smith CEO John Yearwood will be very familiar with any issues surrounding their M-I SWACO drilling joint venture, of which Smith owns 60 percent, having been a Schlumberger representative on its management committee.
Both he and Smith Chief Financial Officer William Restrepo worked at Schlumberger for two decades, with Yearwood's final two years spent as senior adviser to Gould.
EnergyPoint's Sheridan, like many analysts, expects Smith's low-margin Wilson Supply business to be sold eventually. (Reporting by Ernest Scheyder and Steve James in New York, and Braden Reddall in San Francisco; Additional reporting by Diane Bartz in Washington; Editing by Lisa Von Ahn, Tim Dobbyn, Bernard Orr, Phil Berlowitz)
US FDA: No new conclusions on Glaxo's Avandia yet
WASHINGTON (Reuters) - The U.S. Food and Drug Administration is reviewing data on possible heart risks with GlaxoSmithKline Plc's diabetes drug Avandia but has not reached any new conclusions, the agency said Monday.
The FDA will hold a public meeting in July 2010 to discuss the risks and benefits of the drug, but said in the meantime doctors and patients should continue to use Avandia as directed.
"This work is ongoing and no new conclusions or recommendations about the use of rosiglitazone (Avandia) in the treatment of type 2 diabetes have been made at this time," the FDA said, referring to the drug's generic name.
Democratic Representative Rosa DeLauro, in a statement posted on her website, urged the FDA to "remove Avandia from the market until a truly independent, science-based advisory panel can evaluate the safety and effectiveness of the drug."
"It is reprehensible that many people might have suffered heart attacks or heart failure as a result of taking this drug, especially if a safer alternative exists," said DeLauro, who chairs an appropriations subcommittee that funds the FDA.
Avandia came back in the spotlight after two U.S. senators on Saturday released a report on the drug and internal FDA documents. The documents included a 2008 memo from two FDA drug safety reviewers who recommended pulling the drug from the U.S. market after they concluded it was more dangerous to the heart than the rival drug Actos by Takeda Pharmaceutical Co Ltd .
One of the reviewers, FDA critic David Graham, had argued to an advisory panel in 2007 that Avandia should no longer be sold. That panel voted 22-1 to recommend the drug remain on the market.
Glaxo shares fell 2.5 percent to close at $37.32 on the New York Stock Exchange on Monday. Analysts said new attacks on Avandia could add to litigation risks and help rival drugmakers.
Sales of Avandia topped $3 billion in 2006, but fell to $1.2 billion in 2009.
Glaxo said the scientific evidence did not establish that Avandia increased heart attack risks and added it had been open in providing information about the drug.
The company "stands behind the safety and efficacy of Avandia when used appropriately and according to its label and maintains that this is an important medicine for the treatment of type 2 diabetes," Glaxo spokeswoman Mary Anne Rhyne said.
The FDA said Monday it is reviewing data from a Glaxo-sponsored study known as Record, as well as other studies that look at the cardiovascular safety of Avandia. The FDA will present all of the safety data at a public advisory panel meeting in July.
The FDA decided in November 2007 Avandia should carry a warning saying a review of 42 studies associated the drug with an increased risk of a heart attack or chest pain compared with a placebo. But it said overall data were "inconclusive."
"We don't find that available information since that time has really changed the assessment," Dr. Janet Woodcock, head of the FDA's drugs center, said on a conference call with doctors on Monday.
Woodcock added, "We feel that it is time for a thorough re-evaluation of all the data of the drug as far as cardiovascular risk, and we are undertaking that right now."
Results from Glaxo's Record study, published in the Lancet medical journal in June 2009, showed Avandia did not increase overall heart risks compared with older diabetes drugs.
"We are neither accepting nor rejecting that conclusion. We are going to have to review in great detail the study data as well as audit the study to determine how robust these findings are," Woodcock said.
Concerns about Avandia emerged in May 2007 when Cleveland Clinic researchers published a study saying there was a link between the drug and heart attacks.
Jeffrey Holford, an analyst at stockbroker Jefferies, said early loss of Avandia from the U.S. market in mid-2010 would cut 2010 and 2011 earnings estimates by less than 1 percent. (Reporting by Lisa Richwine, Susan Heavey and Ben Hirschler; editing by Andre Grenon, Leslie Gevirtz and Bernard Orr)
The FDA will hold a public meeting in July 2010 to discuss the risks and benefits of the drug, but said in the meantime doctors and patients should continue to use Avandia as directed.
"This work is ongoing and no new conclusions or recommendations about the use of rosiglitazone (Avandia) in the treatment of type 2 diabetes have been made at this time," the FDA said, referring to the drug's generic name.
Democratic Representative Rosa DeLauro, in a statement posted on her website, urged the FDA to "remove Avandia from the market until a truly independent, science-based advisory panel can evaluate the safety and effectiveness of the drug."
"It is reprehensible that many people might have suffered heart attacks or heart failure as a result of taking this drug, especially if a safer alternative exists," said DeLauro, who chairs an appropriations subcommittee that funds the FDA.
Avandia came back in the spotlight after two U.S. senators on Saturday released a report on the drug and internal FDA documents. The documents included a 2008 memo from two FDA drug safety reviewers who recommended pulling the drug from the U.S. market after they concluded it was more dangerous to the heart than the rival drug Actos by Takeda Pharmaceutical Co Ltd .
One of the reviewers, FDA critic David Graham, had argued to an advisory panel in 2007 that Avandia should no longer be sold. That panel voted 22-1 to recommend the drug remain on the market.
Glaxo shares fell 2.5 percent to close at $37.32 on the New York Stock Exchange on Monday. Analysts said new attacks on Avandia could add to litigation risks and help rival drugmakers.
Sales of Avandia topped $3 billion in 2006, but fell to $1.2 billion in 2009.
Glaxo said the scientific evidence did not establish that Avandia increased heart attack risks and added it had been open in providing information about the drug.
The company "stands behind the safety and efficacy of Avandia when used appropriately and according to its label and maintains that this is an important medicine for the treatment of type 2 diabetes," Glaxo spokeswoman Mary Anne Rhyne said.
The FDA said Monday it is reviewing data from a Glaxo-sponsored study known as Record, as well as other studies that look at the cardiovascular safety of Avandia. The FDA will present all of the safety data at a public advisory panel meeting in July.
The FDA decided in November 2007 Avandia should carry a warning saying a review of 42 studies associated the drug with an increased risk of a heart attack or chest pain compared with a placebo. But it said overall data were "inconclusive."
"We don't find that available information since that time has really changed the assessment," Dr. Janet Woodcock, head of the FDA's drugs center, said on a conference call with doctors on Monday.
Woodcock added, "We feel that it is time for a thorough re-evaluation of all the data of the drug as far as cardiovascular risk, and we are undertaking that right now."
Results from Glaxo's Record study, published in the Lancet medical journal in June 2009, showed Avandia did not increase overall heart risks compared with older diabetes drugs.
"We are neither accepting nor rejecting that conclusion. We are going to have to review in great detail the study data as well as audit the study to determine how robust these findings are," Woodcock said.
Concerns about Avandia emerged in May 2007 when Cleveland Clinic researchers published a study saying there was a link between the drug and heart attacks.
Jeffrey Holford, an analyst at stockbroker Jefferies, said early loss of Avandia from the U.S. market in mid-2010 would cut 2010 and 2011 earnings estimates by less than 1 percent. (Reporting by Lisa Richwine, Susan Heavey and Ben Hirschler; editing by Andre Grenon, Leslie Gevirtz and Bernard Orr)
US FDA: No new conclusions on Glaxo's Avandia yet
WASHINGTON (Reuters) - The U.S. Food and Drug Administration is reviewing data on possible heart risks with GlaxoSmithKline Plc's diabetes drug Avandia but has not reached any new conclusions, the agency said Monday.
The FDA will hold a public meeting in July 2010 to discuss the risks and benefits of the drug, but said in the meantime doctors and patients should continue to use Avandia as directed.
"This work is ongoing and no new conclusions or recommendations about the use of rosiglitazone (Avandia) in the treatment of type 2 diabetes have been made at this time," the FDA said, referring to the drug's generic name.
Democratic Representative Rosa DeLauro, in a statement posted on her website, urged the FDA to "remove Avandia from the market until a truly independent, science-based advisory panel can evaluate the safety and effectiveness of the drug."
"It is reprehensible that many people might have suffered heart attacks or heart failure as a result of taking this drug, especially if a safer alternative exists," said DeLauro, who chairs an appropriations subcommittee that funds the FDA.
Avandia came back in the spotlight after two U.S. senators on Saturday released a report on the drug and internal FDA documents. The documents included a 2008 memo from two FDA drug safety reviewers who recommended pulling the drug from the U.S. market after they concluded it was more dangerous to the heart than the rival drug Actos by Takeda Pharmaceutical Co Ltd .
One of the reviewers, FDA critic David Graham, had argued to an advisory panel in 2007 that Avandia should no longer be sold. That panel voted 22-1 to recommend the drug remain on the market.
Glaxo shares fell 2.5 percent to close at $37.32 on the New York Stock Exchange on Monday. Analysts said new attacks on Avandia could add to litigation risks and help rival drugmakers.
Sales of Avandia topped $3 billion in 2006, but fell to $1.2 billion in 2009.
Glaxo said the scientific evidence did not establish that Avandia increased heart attack risks and added it had been open in providing information about the drug.
The company "stands behind the safety and efficacy of Avandia when used appropriately and according to its label and maintains that this is an important medicine for the treatment of type 2 diabetes," Glaxo spokeswoman Mary Anne Rhyne said.
The FDA said Monday it is reviewing data from a Glaxo-sponsored study known as Record, as well as other studies that look at the cardiovascular safety of Avandia. The FDA will present all of the safety data at a public advisory panel meeting in July.
The FDA decided in November 2007 Avandia should carry a warning saying a review of 42 studies associated the drug with an increased risk of a heart attack or chest pain compared with a placebo. But it said overall data were "inconclusive."
"We don't find that available information since that time has really changed the assessment," Dr. Janet Woodcock, head of the FDA's drugs center, said on a conference call with doctors on Monday.
Woodcock added, "We feel that it is time for a thorough re-evaluation of all the data of the drug as far as cardiovascular risk, and we are undertaking that right now."
Results from Glaxo's Record study, published in the Lancet medical journal in June 2009, showed Avandia did not increase overall heart risks compared with older diabetes drugs.
"We are neither accepting nor rejecting that conclusion. We are going to have to review in great detail the study data as well as audit the study to determine how robust these findings are," Woodcock said.
Concerns about Avandia emerged in May 2007 when Cleveland Clinic researchers published a study saying there was a link between the drug and heart attacks.
Jeffrey Holford, an analyst at stockbroker Jefferies, said early loss of Avandia from the U.S. market in mid-2010 would cut 2010 and 2011 earnings estimates by less than 1 percent. (Reporting by Lisa Richwine, Susan Heavey and Ben Hirschler; editing by Andre Grenon, Leslie Gevirtz and Bernard Orr)
The FDA will hold a public meeting in July 2010 to discuss the risks and benefits of the drug, but said in the meantime doctors and patients should continue to use Avandia as directed.
"This work is ongoing and no new conclusions or recommendations about the use of rosiglitazone (Avandia) in the treatment of type 2 diabetes have been made at this time," the FDA said, referring to the drug's generic name.
Democratic Representative Rosa DeLauro, in a statement posted on her website, urged the FDA to "remove Avandia from the market until a truly independent, science-based advisory panel can evaluate the safety and effectiveness of the drug."
"It is reprehensible that many people might have suffered heart attacks or heart failure as a result of taking this drug, especially if a safer alternative exists," said DeLauro, who chairs an appropriations subcommittee that funds the FDA.
Avandia came back in the spotlight after two U.S. senators on Saturday released a report on the drug and internal FDA documents. The documents included a 2008 memo from two FDA drug safety reviewers who recommended pulling the drug from the U.S. market after they concluded it was more dangerous to the heart than the rival drug Actos by Takeda Pharmaceutical Co Ltd .
One of the reviewers, FDA critic David Graham, had argued to an advisory panel in 2007 that Avandia should no longer be sold. That panel voted 22-1 to recommend the drug remain on the market.
Glaxo shares fell 2.5 percent to close at $37.32 on the New York Stock Exchange on Monday. Analysts said new attacks on Avandia could add to litigation risks and help rival drugmakers.
Sales of Avandia topped $3 billion in 2006, but fell to $1.2 billion in 2009.
Glaxo said the scientific evidence did not establish that Avandia increased heart attack risks and added it had been open in providing information about the drug.
The company "stands behind the safety and efficacy of Avandia when used appropriately and according to its label and maintains that this is an important medicine for the treatment of type 2 diabetes," Glaxo spokeswoman Mary Anne Rhyne said.
The FDA said Monday it is reviewing data from a Glaxo-sponsored study known as Record, as well as other studies that look at the cardiovascular safety of Avandia. The FDA will present all of the safety data at a public advisory panel meeting in July.
The FDA decided in November 2007 Avandia should carry a warning saying a review of 42 studies associated the drug with an increased risk of a heart attack or chest pain compared with a placebo. But it said overall data were "inconclusive."
"We don't find that available information since that time has really changed the assessment," Dr. Janet Woodcock, head of the FDA's drugs center, said on a conference call with doctors on Monday.
Woodcock added, "We feel that it is time for a thorough re-evaluation of all the data of the drug as far as cardiovascular risk, and we are undertaking that right now."
Results from Glaxo's Record study, published in the Lancet medical journal in June 2009, showed Avandia did not increase overall heart risks compared with older diabetes drugs.
"We are neither accepting nor rejecting that conclusion. We are going to have to review in great detail the study data as well as audit the study to determine how robust these findings are," Woodcock said.
Concerns about Avandia emerged in May 2007 when Cleveland Clinic researchers published a study saying there was a link between the drug and heart attacks.
Jeffrey Holford, an analyst at stockbroker Jefferies, said early loss of Avandia from the U.S. market in mid-2010 would cut 2010 and 2011 earnings estimates by less than 1 percent. (Reporting by Lisa Richwine, Susan Heavey and Ben Hirschler; editing by Andre Grenon, Leslie Gevirtz and Bernard Orr)
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