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Profit-At-All-Cost Capitalism: The Sad Case of Valeant
By Shlomo Maital
This is the story of a drug company called Valeant, and its CEO J. Michael Pearson, as reported in today’s International New York Times, on a page 1 story by Gretchen Morgenson and Geraldine Fabrikant, two excellent business reporters.
Pearson was the architect of Valeant’s strategy, that drove its stock price to an astronomical $262, then saw it crash to $11, and led to Pearson being investigated by the US Senate, along with William J. Ackman, founder of Pershing Square Capital Management, who placed a huge bet on Valeant and lost $ 4 billion; he too is under investigation.
The strategy? Rapacious profit-at-all-cost capitalism. Under Pearson, according to the NY Times, Valeant acquired drug makers with drugs that had few or no substitutes in the US, then jacked up the price by 10 times or more and ripped off hapless patients who needed the drug. Great strategy? Why not, if drug makers are so stupid that they actually share value with ill people and price their product reasonably. Why bother investing money to develop drugs, if you can buy existing drugs and then run them as Economics 101 explains, as little monopolies? Especially when the patent law makes it legal.
What went wrong? A huge public furor arose, politicians got involved, there were investigations, and then short sellers smelled blood and started selling Valeant shares short, putting pressure on the stock and leading to its collapse.
Here is how Forbes magazine describes Valeant’s price-gouging actions, along with another company Turing:
“Valeant and Turing bought monopoly positions in old drugs that faced no direct competition in the United States. But they are important medicines. Nitropress, used to treat patients whose blood pressure has risen to dangerous levels, jumped in price by more than three times to $805 per vial immediately after Valeant’s purchase, while Isuprel, which addresses heart rhythm problems, soared more than six times to $1,346 per vial. Turing purchased a 63-year-old anti-parasite pill, Daraprim (pyrimethamine), and took the even more brazen step of inflating its price by more than 5,000 % to $750/tablet.”
How many times will we see this sad drama repeated? Short-term myopic rapacious capitalism destroys wealth and value massively. In fact, what Pearson did is not capitalism at all, it is simply stupidity, driven by Economics 101. Count on this happening again and again, until we redefine and rebuild the basic values of true capitalism – creating sustainable long-term value for customers, and hence, for shareholders.
How Trump Used Psychometrics to Win
By Shlomo Maital
My friend Einar Tangen drew my attention to this article:
Here is the jist of it.
- A psychologist named Michael Kosinski developed a method to analyze people in minute detail, based on their Facebook activity. The technique is known in general as psychometrics: Measuring psychological characteristics from available data.
- The company behind Trump’s online campaign (a key part of his win) was Cambridge Analytica, a Big Data company, which also worked on the LeaveEU campaign for the pro-Brexit group. Cambridge Analytica apparently used Kosinski’s findings…
- How does it work? Cambridge Analytica “buys personal data from a range of sources”… aggregates it with the electoral rolls of the Republican party, and calculates a Big Five personality profile… digital footprints “suddenly become real people with fears, needs, interests and residential addresses.” Motherboard was told: “We (Cambridge Analytica) have profiled the personality of every adult in the U.S. – 220 million people!”.
- An example: Design an ad based on gun rights. An image on the left: an intruder smashing a window. On the right: a man and a child standing in a field, at sunset, both holding guns, clearly shooting ducks. Tradition, habits, security, family.
- “Pretty much every message that Trump put out was data-driven”. E.g., on the day of the 3rd presidential debate (the one Trump did well at), Trump’s team tested 175,000 different ad variations for his arguments, to find the right versions above all, via Facebook. They found what resonated most. “We can address villages or apartment blocks in a targeted way. Even individuals”.
- One goal was to “suppress” Hillary voters. How? Keep left winters, blacks, etc. away from the polls, by (in Miami’s Little Haiti) stressing how the Clinton Foundation failed in its efforts to help, after the Haiti earthquake. These dark posts “can only be seen by users with specific profiles…”.
Amazing that Trump, who lacks even a computer on his desk, was elected by some very very advanced Big Data methods. Thank Steve Bannon, who is not to be underestimated…ever!
What Happens to the Brain During Creativity?
By Shlomo Maital
At the main bus stop, at my university Technion, there is a set of bookshelves, where people drop off unwanted books and others browse and take them. I’ve put a great many books there and they always disappear quickly.
One day this week I noticed some rather old copies of Scientific American. I took two of them, to read while on the bus. One of them had a fascinating article by Charles J. Limb, a surgeon who plays saxophone, does cochleal transplants, and loves John Coltrane. (The article was in the May 2011 issue, nearly 6 years ago).
Using FMRI (functional magnetic resonance imaging), Limb asked, what happens to the brain when jazz musicians improvise? Coltrane, legendary tenor sax player, did incredible improvisations. How? Why?
Here is what Limb found: “creativity is whole-brain…during improvisation, the lateral prefrontal region of the cortex shuts down (areas involved in conscious self-inhibition, self-monitoring, evaluation of rightness and wrongness of what you are doing). Another area of the prefrontal cortex, medial prefrontal cortex, turns on…this is the focal area of the brain that’s involved in self-expression and autobiographical narrative..it has do to with sense of self.”
Brief summary? Want to create? Turn off all inhibition, judging, evaluating, good or bad. Turn them off. Activate your own self, self-awareness, self-expression… express who you are, what you are, tell your story.
And Coltrane? “He practiced. He was an obsessive—he practiced obsessively. He was after the ability to have an idea he had never had before…be profound, and be able to executive the idea.”
John Coltrane was creative, had ideas…but he had technique, he mastered his instrument so that he could effortless IMPLEMENT his creative ideas. You need both. Discovery (creativity). And Delivery (practice, practice, mastery mastery!).
That, according to Limb, is creativity.
Snap – Netscape On Steroids?
By Shlomo Maital
On August 1995, Wall St. witnessed a near-miracle. A company called Netscape Communications, maker of the first widely-used Internet browser (given away for free) did an initial public offering of its shares.
Here is what happened: “The stock was set to be offered at US$14 per share, but a last-minute decision doubled the initial offering to US$28 per share. The stock’s value soared to US$75 during the first day of trading, nearly a record for first-day gain. The stock closed at US$58.25, which gave Netscape a market value of US$2.9 billion.”
That defying-gravity IPO showed Wall St. it had a sure-fire way to print money – issue shares of dot.com companies, and watch the manic rise print profits for insiders. The bubble burst in 2000/1, and then came a bigger collapse, in 2007/8.
Fast forward to the remarkable IPO of Snap Inc. (Snapchat, photo messaging company).
“Snap shares closed their first day of trading up 44 percent at $24.48 a share, quenching a long drought in the market for tech IPOs. More than 200 million shares — the entire size of the offering — changed hands over the course of the day, accounting for roughly 10 percent of the total volume of trading on the New York Stock Exchange on Thursday. The stock opened shortly before 11:20 a.m. on Thursday in New York, and started trading at $24 a share, rising 41.2 percent from its pricing at the open. The company, trading under the ticker SNAP, priced its public offering at $17 a share on Wednesday. Share prices rose as high as $26.05, and fell as low as $23.50. The opening price of $24 puts the company’s market capitalization at about $33 billion, about the size of Marriot and Target. Twitter’s market cap is about 11 billion, while Facebook’s is about $395 billion. The young ephemeral photo messaging company posted a $515 million loss last year. “
So, a company that lost over half a billion dollars last year is valued by the market at $33 b., equal to the valuation of a huge hotel chain, profitable, or a huge retail chain, also highly profitable.
Here we go again.
Why You Must Listen to Sales!
By Shlomo Maital
As a management educator, I recall doing Workshops for senior management, and asking participants what their job function was. More often than not, one key position was missing – Sales. The sales personnel had no time for Workshops. They were out in the field, selling, because much of their income was based on commission…and you get no commissions sitting and listening to a professor.
Far from sight, far from mind. When sales does not sit in headquarters, it is often underused or even forgotten. Yet it is sales, not marketing, that has the key market insights.
Now comes Sony, comes an object lesson in why you must listen to sales. Sony has been struggling for years. Finally, it has a winner – Sony Interactive Entertainment (its video game division) has a winner, PlayStation VR, a virtual reality headset. Since it went on sale in October, it has been scarce in stores, especially in Japan.
Andrew House, global CEO of the division, among those inside the company advising that Sony make fewer of the headsets, explains, “it’s the classic case in any organization – the guys who are on the front end in sales are getting very excited, very hyped up….you have to temper that with other voices inside the company, myself among them, saying let’s just be a little bit careful.”
Let’s think about that. Those who make the sales, and who earn their income from them, are hyped up. They know the market. They know what they can sell and how many. But the headquarters gang, up in the corner office, on the 42nd floor, who haven’t talked to a real customer for a decade – they are cautious.
So whom to you listen to?
For innovators, and startup entrepreneurs: At the outset, forget about marketing. Focus on sales. Find a great salesperson. Get them out into the market. And consult with him or her frequently, often, and really listen, and take their advice seriously.
Lost sales due to undersupply will usually not be recovered. Sony’s VR has competitors. Four months after it went on sale, Sony’s VR headsets sold 915,0000! This is not that far from iPhone’s 1.4 million unit sales in three months, after launch in 2007. So, did Andrew House learn a lesson? I wonder.
Source: Global NYT, Int. edition, March 1/ 2017, p. 9.
By Shlomo Maital
Today’s New York Times has an unusual Op-Ed piece by James Rebanks, a British sheep farmer, who lives in the lovely Lake District. (I recall hiking there, when I was a student at U. of Manchester 50 years ago). He is touring the US to promote his new book, a memoir, “The Shepherd’s Life”.
Here is a key passage: “Economists say that when the world changes people will adapt, move and change to fit the new world. But of course, real human beings often don’t do that. They cling to the places they love, and their identity remains tied to the outdated or inefficient things they used to do, like being steel workers or farmers. Often, their skills are not transferable anyway, and they have no interest in the new opportunities. So, these people get left behind.”
We economists spin theories from our comfy offices, about how the force of social Darwinism (competition for resources) drives efficiency. You’re a farmer? Herd sheep? Your country imports cheap mutton? Tough for you. Find another trade. That’s life.
This is the economic theory. It’s time to rethink it.
Economic freedom should also mean the freedom to choose our livelihood, and to engage in it as long as we wish. Farmers are so few, so forgotten, and are so threatened..Rebanks writes about abandoned farms through the US, but who cares? Who even notices? America is flooded with cheap (and mostly unhealthy) food from abroad.
Rural America matters. So does rural EVERYwhere. Rebanks is right. Time to rethink the cruel free-market theory economists sold the world.
Last Saturday (shabbat), I had the privilege to read a passage from the Bible, Kings 2, in our synagogue. The passage tells how young King Joash restores the Temple, by raising crowdfund money, “everyone according to his heart” and to his soul. Money. Heart. Soul. Those three things must go together in any economic system that claims to be just and fair. An economic system without a heart or soul is unacceptable.
Mildred Dresselhaus, 1930-2017
By Shlomo Maital
On Feb. 20, MIT Professor of physics and electrical engineering, Mildred Dresselhaus, passed away at her home in Cambridge, MA. She was 86. Born Mildred Spiewak, she was the very first female Institute Professor at MIT (an Institute Professor is a super-distinguished professor).
Dresselhaus was known as the Queen of Carbon, in scientific circles. She used magnetic fields and lasers to map out the electric structure of carbon and found that by stitching in alkali materials, carbon can become a superconductor. She pioneered in researching “buckyballs” (fullerenes), soccer-ball shaped cages of carbon atoms, widely used for drug delivery, lubricants and catalysts. She also had the idea of rolling a single layer of carbon atoms into a hollow tube, the nanotube, making a structure with the strength of steel but just 1/10,000th the width of a human hair.
Dresselhaus published over 1,700 scientific papers. Her life was one of struggle and perseverance. She was the daughter of poor Jewish immigrants from Poland, and grew up in the Bronx. She went through university on scholarship.
She once recounted, according to the New York Times, “my early years were spent in a dangerous multiracial low-income neighborhood. My early elementary school memories up through ninth grade are of teachers struggling to maintain class discipline with occasional coverage of academics”. From age 6, she travelled long distances on the subway. She got in to Hunter High School, in Manhattan, and then Hunter College. Her lifelong mentor was Nobel Laureate Rosalyn Yalow, from whom she took an elementary physics course.
Why did she choose to study carbon? Because it was unpopular and considered uninteresting, she observed. She and her husband were hired by MIT in 1960, because MIT was one of the few places that would hire a husband and wife team. At Lincoln Labs, she was one of only two women, out of a scientific staff of 1,000.
She is survived by her husband Gene, and four children, Marianne, Carl, Paul and Eliot, and five grandchildren. She will be remembered as the first woman to secure a full professorship at MIT, in 1968, and she worked “very vigorously to ensure she would not be the last”, observed Natalie Angier, in the New York Times.
How Life Began on Earth
By Shlomo Maital
Miller and Urey …. And their famous experiment
Stephen Hawking’s brilliant PBS series Genius has a segment on how life began and evolved. In it the amazing 1952 chemistry experiment of Stanley Miller and Harold Urey (U. of Chicago) was described. The experiment shed light on how life began on earth.
The experiment was beautifully simple. We know now that life is mainly made of proteins, and proteins are made up of amino acids. But how did amino acids form? And what do amino acids do for us?
- In the brain, glutamate is the main neurotransmitter (sending signals from one neuron to another, known as thinking) as neurotransmitters; hydroxyproline is an important component of our connective tissue; glycine is crucial for red blood cells (that carry oxygen to all parts of the body); and another amino acid carries fat cells (lipids).
Miller and Urey took methane gas, ammonia, and hydrogen gas, the gases prevalent in the earth’s atmosphere billions of years ago; they boiled water to create ‘clouds’ in the atmosphere; and added sparks, representing the lightning then occurring. Basically a very simple simulation of the gases in the earth’s atmosphere as it was when early life first formed, with some electrical energy from lightning.
They ran the experiment for a week, then opened the flask and checked to see what happened.
They found that three amino acids were formed. Amino acids are made of carbon, hydrogen, oxygen and nitrogen. The experiment showed how amino acids could have formed in the earth’s atmosphere…and, presumably, life began later, as the amino acids combined and became complex.
For those who love the Bible, does this demean our faith? Not in the least. I asked a very religious relative about this, and his response was that evolution, and the Urey experiment, confirm the Biblical creation account, rather than deny it. The beauty and complexity of all the forms of life that evolved from a handful of amino acids are surely inspiringly divine in their nature.
As a postscript: After Miller’s death in 2007, scientists examining sealed vials preserved from the original experiments were able to show that there were actually well over 20 different amino acids produced in Miller’s original experiments.