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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.
Why U.S. Dams (and Society) Are Crumbling
By Shlomo Maital
Two newspaper items (one in New York Times, the other, Financial Times) reveal why America is crumbling.
California’s Oroville Dam, America’s tallest, has a crumbling spillway that forces evacuation of 200,000 nearby residents. (A dam collapse in California in 1928 killed 400, as a wave of water swept over them). As early as 2005, experts spotted a design flaw in the dam – never corrected. Heavy rains filled the reservoir to capacity, and severe weather because of global warming reveals that this dam, and many others, are not up to the changing weather patterns, for which they were not designed.
There are 1,585 dams in California, notes the NYT, and 90,000 dams across the U.S. Many are in poor shape. Why? “Government is more inclined to invest money in building new projects, than in less visible and glamorous maintenance”.
America is a consumption-driven society that under-saves. A $500 b. trade deficit (imports minus exports) for nearly 3 decades is a symptom. China is not to blame. The U.S. itself is. It is comfortable to borrow money from China to buy consumer goods. Some 23 years ago, my wife Dr. Sharona Maital and I published an article, in the Journal of Socioeconomics, in which we warned about a drastic fall in savings behavior in the US and Western countries. * Nothing has changed since.
The Financial Times notes today:
“China ended a six-month streak disposing of its US Treasury holdings in December, adding to its position for the first time since last May as the country’s central bank seeks to manage capital flight. The country, which ceded its status as the world’s largest owner of haven Treasuries in October to Japan, added $9.1bn of US sovereign debt to its reserves in the final month of 2016, new data from the Treasury and Federal Reserve showed on Wednesday.”
So, in the post-Trump era, America has gone back to borrowing, to buy consumer goods rather than maintain its dams, its roads, schools and infrastructure.
And President Trump? He is rapidly running down his checklist of promises, issuing so far 11 Executive orders. But what about that trillion-dollar infrastructure plan? Dead silence. Why? Because it will take a vast plan to design and implement it. In the current chaos of the new Administration, it is unclear whether the Trump presidency is up to the challenge – or even whether it is aware of the problem.
So America – at least, its dams and roads – are crumbling. I don’t see a solution in the near term.
* Shlomo Maital and Sharone L. Maital. “Is the Future What It Used To Be? A Behavioral Theory of the Decline of Saving in the West”. Journal of Socio-Economics, vol. 23, 1,2. 1994.
Retirement Security: Not Just About Money
By Shlomo Maital
Writing in the American Psychologist (2016, no. 4.), Jacquelyn Boone James and Christina Matz-Costa, along with Michael A. Smyer, make a simple, key point. Retirement security is NOT just about having enough money. It is also about “psychological security” — the desire to stay engaged, contribute to society, and feel a sense of belonging in later life.
I am 74 and am keenly aware of this. At this age, it is a daily struggle to remain relevant for those around me. How to do it?
Find new and better ways to “create value”, the mantra of entrepreneurs. Support grandchildren (and children), and provide them with the previous-generation computer, tablet, smartphone or automobile; encourage them, give gentle advice, and just be there to listen. Be a good colleague. I regularly bake bread for my officemates; small but for them, noticed and valued.
Bring your experience to the table. Do it gently, because the world changes rapidly – but often, noting what has gone before is of value to those who are unaware of it.
Generate lots of ideas, and then give them away – let your colleagues grab them and run with them, and even own them. Giving up a child for adoption is painful, but giving up ideas for adoption can be glorious.
Give praise and encouragement generously. Often praise (when deserved) is a scarce commodity. Help even the score.
Be a good listener. Offer your ear to your colleagues and your family, and simply listen attentively. Sometimes, that’s all they want. Not solutions, or suggestions, but simply, someone to listen.
Invest time to keep up to date. A key part of relevance is knowing what is going on today. If your knowledge is dated, and it quickly becomes so, it will be less and less valuable, and you will be less and less relevant.
Work at creating value for those around you daily, make it a part of your life, and you will ultimately achieve a large measure of psychological security, because you will be needed by those you love and care about – and nothing can be more important or meaningful, for seniors.
How Technion Physicists Cracked a Mystery of Biology
By Shlomo Maital
A team of Technion-Israel Institute of Technology physicists (led by Profs. Kinneret Keren and Erez Braun, with a group of students) has published breakthrough research in the journal Cell Reports. It is unusual for physicists to publish in a biology journal. Here is the story.
The subject of the research was the amazing ability of the “hydra”, a tiny fresh water animal, 1 cm. in size (about half an inch), to regenerate itself. The hydra’s skeleton has a built-in memory that enables it to regenerate. If you take a piece of hydra tissue, it can soon regenerate the entire animal. But how? Until now, it was thought that this worked through chemical signals that guided the tissue on how to create a head, tentacles and a foot.
But the new Technion study finds a different explanation. It is done with thin protein fibers. The skeleton of the protein fibers survive, and they instruct cells how to arrange themselves to create an adult body. First, the pieces of tissue severed from the hydra form a small ball. This forces the protein fibers to balance the preservation of the old skeleton structure and adaptation to the new ball. New body parts develop, based on the pattern information stored in the skeleton. The ball soon sprouts a mouth and a whole new animal. The physicist researchers used their science to understand the physical role of the “ball”.
Could this one day lead to a technology that enables humans to regenerate their body parts? Far fetched? Indeed. But it could happen.
The fruitful research of physicists in biology reminds me of a meeting I had with a distinguished Indian scientist, during a recent visit, who decades ago pioneered in biophysics, which has since yielded huge bounties.
Innovator – if you can link two fields that are heretofore unconnected, you may come up with change-the-world ideas.