The forces pushing CVS to buy Aetna - Axios
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The forces pushing CVS to buy Aetna

Illustration: Lazaro Gamio / Axios

If CVS makes a formal offer to buy Aetna, it will represent an attempt to stave off any future drug supply chain competition from Amazon and fight the growing incumbent power of UnitedHealth Group.

Between the lines: The CVS-Aetna merger is "more defensive than offensive," Leerink Partners analyst Ana Gupte told investors.

The Amazon angle: Amazon's potential entry into drug distribution spurred CVS to consider acquiring Aetna, the Wall Street Journal reported.

  • CVS previously expressed concerns about Amazon as well as confidence it still had the edge.
  • "Amazon's a respected competitor. You don't take anything lightly that they may be doing. That said, pharmacy is not a commodity business...it's a highly regulated industry," CVS CEO Larry Merlo said at a May industry conference.
  • CVS is more than just its pharmacy stores. Its biggest business is its role as a pharmacy benefit manager, which negotiates drug prices and creates lists of covered drugs for employers and insurers.
  • Operating pharmacies and being a pharmacy benefit manager are a lot more complicated than selling and shipping consumer goods. Acquiring another highly regulated business, like Aetna and its health insurance products, would create more distance between CVS and Amazon.

The UnitedHealth angle: CVS also approached UnitedHealth about merging, the Wall Street Journal reported. It's easy to see why.

  • UnitedHealth's integrated model — being a large health insurer, pharmacy benefit manager and provider under one roof — has served as the health care blueprint for larger growth and gigantic earnings.
  • UnitedHealth's pharmacy benefit manager, OptumRx, has won many big contracts over CVS.
  • There likely would be more antitrust issues by merging with UnitedHealth, but creating a bigger competitor is CVS' next best option.
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Former JC Penney CEO: Amazon should fear Walmart

Elise Amendola / AP

Former JCPenney CEO and Apple Store pioneer Ron Johnson said on CNBC's Fast Money that Amazon "should be really worried" about Walmart's resurgence of late, arguing that the Bentonville retailer's network of stores is cheaper and more efficient to operate than Amazon's collection of warehouses.

Why it matters: Walmart's earnings announcement was the highlight of a week filled with surprisingly strong performance by Amazon's brick-and-mortar competitors, like Best Buy, Gap, Abercrombie, and Foot Locker, which all reported stronger than expected same-store sales growth. These performances have powered the SPDR S&P Retail ETF 3.9% higher this week — its best five-day stretch of the year.

Sound smart: Despite a good week, Retail indices are still down year-to-date, while Amazon's value is up more than 50%. Outside of a few exceptions like Walmart and Best Buy, brick-and-mortar retailers are still struggling to attract traffic and grow sales, just less so that we thought last week.


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Elon Musk unveils an electric semi-truck

Screenshot from Tesla live feed

In a typically showy ceremony in Southern California last night, Tesla CEO Elon Musk unveiled a sleek prototype electric semi-truck that he said will travel 500 miles on a charge, go zero to 60 mph in 20 seconds fully loaded, and charge most of the way in 30 minutes while a driver rests and eats. He appeared to say that the vehicle will be able to operate semi-autonomously in convoy, which would be the first step to self-driving trucks.

Why it matters: Musk did not say how much the truck will cost, but that it will be cheaper to operate than a standard diesel. If he is able to deliver the semi-truck as described, it seems likely to shake up the freight market just as he has the car business. Experts expect semi-truck traffic to surge in the coming decades as the global population grows to 9 billion people.

The unveil in an airport hanger in Hawthorne, CA., came as Musk is confronting doubts about his ability to pull off arguably his most important project of all — the scale-up of the Model 3, the flagship mainstream-priced electric that he has touted as Tesla's route to the mass market, and the jump-starting of a global electric car industry.

Tesla has taken more than 450,000 reservations at $1,000 apiece for the Model 3, which launched in July, and he was supposed to be turning out 5,000 of them a week by now. But, while making high-profile announcements about a Hyperloop, Space-X launches and now the prototype semi-truck, he has failed to create a standard automated assembly line for the Model 3, so his workers are building them in part by hand, and only by the dozen. As a result, Tesla's sky-high share price has plunged by about 19% over the last two months, closing at $312.50 yesterday.

    • Yet the semi-truck launch, with unexpected specs including a far-more-than-expected range, seems likely to wow his fans and quiet at least some of his critics. Musk said the average truck trip is less than 250 miles, which meant that a driver could do a round trip without recharging. Still, Musk said the truck's battery pack, built into the floorboard, can be charged to 80% of capacity in 30 minutes. He said solar-powered "mega-charging" stations for the trucks would be installed worldwide, and would be priced at 7 cents a kilowatt.
    • The cost per mile would be $1.26, compared with $1.51 for a diesel-operated truck. If the semi-truck is operated in a convoy, he said, the efficiencies took the operating cost below $1 a mile, and made them cheaper than moving freight by train.
    • The two details — range and recharge time — were crucial, and they dispelled the most profound doubts about the truck. In addition, he said standard equipment will include automatic breaking, lane-keeping and forward collision warning.
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GOP tax plans could worsen housing affordability crisis

Photo: Keith Srakocic / AP

Proposed changes to corporate tax rates, and tax credits for the construction of below-market housing, could worsen the nation's affordability crisis, the Wall Street Journal reports.

Why it matters: A recent report from Freddie Mac estimates that America's stock of housing that is affordable for low-income Americans fell by 60% between 2010 and 2016.

  • The problem is concentrated in cities with the highest-paying jobs, like New York, Seattle, and San Francisco.
  • The lack of affordable homes in America's most economically vibrant areas is reducing economic mobility, because workers cannot afford to move to cities with higher-paying jobs.

Both the House and Senate tax bills, by lowering the corporate tax rate from 35% to 20%, would automatically reduce the uptake of the affordable housing credit, because lower rates make tax credits less valuable.

  • The House bill goes further, eliminating a tax break on bonds used to finance affordable housing projects.
  • The Journal cites a report by Novogradac & Co., an accounting firm specializing in real estate, that predicts if the House bill passes, the U.S. economy would create 1 million fewer affordable housing units over ten years.

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Immelt says he wasn't "ready" to lead Uber

Lauren Olinger / Axios

Former GE CEO Jeffrey Immelt said he's ok with not getting picked to be CEO of Uber. "At the end of the day I wasn't really ready for something that visible, that intense," Immelt said at an Axios "Smarter Faster Revolution" event at the University of North Carolina.

He said Uber is based on a "seminal" idea but an open question remains: "Can you take this thing that's an amazing idea and turn it into a fantastic business, a profitable business?"

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Average Bitcoin investor would sell at $196,165 — or 26x current value

A Robocoin kiosk used to sell bitcoins. Photo: Jeff Chiu / AP

A new LendEDU survey of Bitcoin investors shows that a vast majority plan to hold their investment for over a year, challenging the assumption that the cryptocurrency is mostly used by short-term investors.

Why it matters: Only 16.49% of respondents to the survey said they planned to hold their Bitcoin for less than a year, coupled with more than two-thirds who hadn't sold any of their investment. If these results are actually indicative of most Bitcoin investors, that finding suggests a much stronger long-term outlook for the cryptocurrency as a viable, productive investment.

More from the survey:

  • A third of Bitcoin investors don't plan on reporting their purchase to the IRS, which officially states that "virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency."
  • The average investor would sell their Bitcoin at a price of $196,165.78, which is more than 26 times higher than the current price of $7,476.78.
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Best Buy misses revenue forecast on late iPhone release

Alan Diaz / AP

Best Buy reported third-quarter earnings and revenue below analyst forecasts, sending the retailer's stock down 6.6% in early trading Thursday. It said $100 million in revenue was not registered in the third quarter, due to Apple delaying the release of its iPhone X—though these sales will presumably show up in the fourth quarter numbers.

Why it matters: Best Buy has ramped up discounts to keep pace with rivals like Amazon.com, and is now offering free shipping through Christmas, with no minimum order requirements.

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Trucks are fueling the world's oil demand

Tesla is hardly the only player in the nascent electric truck market — as Bloomberg notes — as big companies like Daimler and Cummins are moving toward commercialization.

Why electric trucks matter: Trucks, especially big rigs, are a small percentage of vehicles on the road but use lots of oil. (Check out the chart above, reconstructed from the International Energy Agency's new World Energy Outlook 2017.)

Data: IEA World Energy Outlook 2017, OECD/IEA; Chart: Andrew Witherspoon / Axios

In what amounts to IEA's base case (a model of existing and officially announced policies), oil demand for trucking swells to 20 million barrels per day in 2040, led by that sharp increase you see in diesel demand for heavy-duty freight.

  • It's one reason, though hardly the only one, why IEA does not forecast a peak in global crude oil demand through the end of their analysis period in 2040.

The bottom line: Widespread deployment of electric heavy-duty trucking — alongside other alternative fuels and stronger fuel efficiency mandates for diesel-powered rigs — could alter the trajectory of oil demand in coming decade if Musk and other players can make it cost-effective.

Go deeper: Check out a preview of Tesla's electric truck, which is scheduled to be unveiled today.

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Walmart revenue soars on strength of online sales

Photo: Jeff Chiu / AP

The reigning heavyweight champion of brick-and-mortar retail is making a name for itself in e-commerce, with Walmart announcing that online sales grew 50% in the third quarter, powering the company's revenue past analyst expectations.

Why it matters: Acquisitions of e-commerce upstarts like Jet.com, Modcloth, and Bonobos have helped supercharge online growth, but Walmart.com is also benefiting from innovations like free two-day delivery on orders more than $35 and curbside pick-up.

The better than expected numbers were about more than e-commerce:

  • Same-store sales rose by 2.7%, well above analyst expectations of 1.7%.
  • Grocery sales were strong, powering the average customer spend 1.2% and illustrating customers durable preference so far for brick-and-mortar grocery shopping.
  • Walmart stock is up 4% in early trading.
One problem was a decline in operating income due to shrinking profit margins as Walmart and subsidiaries like Jet.com invest heavily in discounting aimed at growing market share.
Featured

Data detective, and 20 other jobs titles of the future

Data detective. Man-machine teaming manager. Genetic Diversity Officer. Those are some of the new job titles we are likely to see over the next 10 years, according to professional services firm Cognizant.

Why it matters: Job prospects for truck drivers and cashiers may be dimming, but there are a range of entirely new jobs being created.

Within the next 5 years:

  • Data Detective
  • Bring Your Own IT Facilitator
  • Ethical Sourcing Manager
  • AI Business Development Manager
  • Master of Edge Computing
  • Walker/Talker
  • Fitness Commitment Counselor
  • AI-Assisted Healthcare Technician
  • Cyber City Analyst
  • Genomic Portfolio Director
  • Man-Machine Teaming Manager
  • Financial Wellness Coach
  • Digital Tailor
  • Chief Trust Officer
  • Quantum Machine Learning Analyst

Within the next 10 years:

  • Virtual Store Sherpa
  • Personal Data Broker
  • Personal Memory Curator
  • Augmented Reality Journey Builder
  • Highway Controller
  • Genetic Diversity Officer
Featured

AI searches for new inspiration

Illustration: Lazaro Gamio / Axios

Deep learning — the AI technique that allowed a computer to beat a world-champion Go player — has become very good at recognizing patterns in images and games. But it's loosely based on ideas we've had about the human brain for decades. Researchers now have more insights from neuroscience and better technologies, both of which they are trying to use to make more intelligent machines.

What's new: On Tuesday, DeepMind co-founder Demis Hassabis presented new work from the company that indicates a move into different territory. Researchers gave an AI system pictures of a 3D scene, along with the coordinates of the camera angles, and it was able to output a new scene from an angle it had never seen. Being able to build models of the world like this — and then use them to react and respond to new situations never encountered before — is considered key to intelligence.

The unpublished work was presented at the Society for Neuroscience's annual meeting in Washington, D.C. It's one example of different kinds of learning that researchers would like to develop in AI — and one based on aspects of human intelligence that computers haven't mastered yet.

The approach is among a few being tried but one that some researchers are excited about because, as Hassabis recently wrote, "[The human brain is] the only existing proof that such an intelligence is even possible."

"A lot of the machine learning people now are turning back to neuroscience and asking what have we learned about the brain over the last few decades, and how we can translate principles of neuroscience in the brain to make better algorithms," says Saket Navlakha, a computer scientist at the Salk Institute for Biological Sciences.

Last week, he and his colleagues published a paper suggesting that incorporating a strategy used by fruit flies to decide whether to avoid an odor it hasn't encountered before can improve a computer's searches for similar images.

Other goals:

  • One-shot learning. Children can learn a new word, task or concept from few examples. For some of the first deep learning algorithms, it required massive amounts of data. Progress has been made in reducing the amount of data needed, but it is still far more than what a two-year-old needs to learn.
  • Attention: In a crowded place, most of us are able to pay attention to what we need to know and filter out the rest. "Trying to include this idea in neural networks and machine learning is something people are paying more attention to," says Navlakha.
  • External memory: Brains have multiple systems for memory that operate at different time scales. Researchers want to see if they can give algorithms the equivalent of working memory or scratch pads. DeepMind combined external memory with deep learning to create an algorithm that can efficiently navigate the London Underground.
  • Intuitive physics. We recognize when something is physically off — an airplane balancing on its wing on a highway is clearly not right to us. But when a computer puts a caption to just that image, it reads "an airplane is parked on a tarmac at the airport." NYU's Brenden Lake says, "We don't know how the brain has those abilities."
  • Lifelong learning. Humans are built to constantly integrate new and perhaps sometimes conflicting information, resolve it and maybe even at times have to revise our entire understanding of something. "This constant change over time is something machine learning and AI has been struggling with," says Navlakha.

The big question for all AI approaches: What problem is a particular algorithm best suited to solve, and will it be better than other AI techniques? For neuroscience-inspired AI, there has been early progress but "the jury is still out," says Oren Etzioni, who heads the Allen Institute for Artificial Intelligence.

The big picture: It isn't about replicating the brain in a computer, but building a mathematical theory of learning, says Terrence Sejnowski who is also at the Salk Institute. "Eventually we will get to a point where theory in the machine learning world will illuminate neuroscience in a way unlike we've seen so far."

The back story: Deep learning algorithms only started to work in recent years as more data became available to train them and more processing power could be dedicated to them. In that sense, Sejnowski and others say what we've seen so far is really an "engineering achievement."

The field's pioneer, Geoffrey Hinton, recently said it needs new ideas.

The recent advances have reignited a bit of a debate among AI researchers about how best to actually do this. One way is to find principles of how the brain works and translate them into machine learning and other applications.

There's the "build it like the brain" approach — and to that end, efforts to map how neurons communicate with one another. And then there is the strategy of hard-wiring rules gleaned from models of how humans learn. MIT's Joshua Tenenbaum, Lake and their colleagues suggest the latter is needed to get beyond the accomplishments of pattern recognition. It's very likely advances will come from combining both.

"A more productive way to think about it is that there are some core things that infants, children, and adults use to learn new concepts and perform new tasks," says Lake. He suggests these principles of development and cognition should be seen as milestones and targets for machine learning algorithms to capture, however they get there.