Corporate Malfeasance Keeps Our Families from Having Ventilators

It was 2010 and Newport Medical Instruments, a small medical device company in Costa Mesa, California, was excited. They had just signed a federal contract to design and build up to 40,000 mobile ventilators, which would be placed into the national stockpile in the interest of pandemic preparedness. After SARS and bird flu and swine flu, the government needed to steel itself should a deadly infectious disease go viral.

Newport agreed to deliver the devices at a low-cost, not only to maximize federal purchases but also to build a reputation that could increase sales to other countries and the private sector. The company sent prototypes within a year, and was on track for market approval by 2013.

But before that could happen, Covidien, a larger firm, announced a bid to purchase Newport for $108 million in March 2012. The Federal Trade Commission didn’t even give it a second look; the deal closed in May. And Covidien sold its own ventilators. They weren’t interested in developing a new model that could cut into its existing profits. Covidien immediately asked for more money from the government, and by 2014 they called off the deal because “it was not sufficiently profitable for the company.” The government started over, found another little company to make the ventilators, and they were just about to start delivering them—in mid-2020, too late to assist the immediate COVID-19 crisis.

Amazingly, this maneuver, where a large company buys out an upstart making an innovative product that could outcompete their tried-and-true model, is relatively common. In a 2018 paper called Killer Acquisitions, researchers at Yale and the London Business School found an average of 45 instances per year of pharmaceutical firms buying out competitors developing rival drugs that could cut into their profits, and subsequently putting the new therapeutic on ice. Last October, Roche purchased a small firm called Spark Therapeutics, which was successfully testing a one-time hemophilia A treatment. Roche’s hemophilia drug Hemlibra requires a dosage every four weeks, so they had plenty of incentive to put the one-time drug, or in other words the cure, on the shelf.

But in addition to the business play being familiar, the name Covidien rang a bell for me too. In June 2014, around the time Covidien dissolved the government ventilator deal, Medtronic, an even bigger medical device firm, decided to buy it out. That was notable because Medtronic, then based in the United States, took over Covidien’s corporate headquarters and based itself in Ireland. This “corporate inversion” allowed Medtronic to sweep at least $1 billion in Covidien profits into the U.S. without a tax penalty. Covidien itself was only “based in Ireland” as a legal fiction—really it was run out of Mansfield, Massachusetts—but locating in a low-tax country had its advantages. Covidien, incidentally, had been shopping around for a tax haven to call home since 1997, when it was part of Tyco International, an accounting violation disguised as a company whose CEO Dennis Kozlowski eventually went to jail. Covidien spent some time in Bermuda before landing in Ireland. Of course, its employees toiled in Massachusetts; the on-paper domicile was just a tax avoidance strategy.

Oh yeah, and Medtronic/Covidien led to $850 million in “synergies,” mostly through consolidating its supply chain, the very activity now causing havoc in the distribution of medical supplies around the world.

So let’s review: Covidien, a longtime corporate tax cheat and serial acquirer of competitors, scooped up a rival and scotched its most promising project, which if allowed to go forward would have significantly boosted our ability to cope with pandemics. Then it merged with an even bigger rival and lent it the same tax avoidance and corporate consolidation tactics, making the medical supply chain even more fragile.

I didn’t think you could find all of the numerous problems with corporate America’s drive for short-term profits and monopoly power, and the tragic consequences of this orientation, in one company. But that’s the Covidien difference.