Mod Note (Andy) - "Interesting Things" by user Adventure_Capitalist (a PE professional) is a new addition to the site that we hope to have each week. This is a newsletter that he has been sharing between friends for awhile now and we thought it would be a good addition to the site, similar to what Bonus Bananas had to offer.
@GSElevator – #1: Public speaking is easy. Just imagine that everyone in the audience is staring at their phones.
1. Quote Of The Week / 2. Solar's Time In The Sun / 3. Valeant: Worse Than Herbalife? / 4. Interesting Links / 5. Joke Of The Week
1. QUOTE OF THE WEEK
“You can observe a lot just by watching.”
From The New York Times Obituary of Yogi Berra, the Yankee Who Built His Stardom 90 Percent on Skill and Half on Wit, Dies at 90.
2. SOLAR’S TIME IN THE SUN
The MAC Solar Index, which tracks prominent solar companies, has fallen 43 percent in the last three months as lower oil prices are diverting attention from the increasing competitiveness of renewable energy sources and record deployments as costs steadily decline.
A recent MIT Technology Review analysis highlights that the correlation to the broader energy sector is increasingly false due to three primary reasons: (1) oil is barely used any more to generate electricity in developed economies; (2) the cost of producing power from renewable sources has declined in conjunction with oil prices; and (3) the fundamentals of the renewable energy business have never been stronger.
According to research by Citigroup, this is because fuel costs can account for 80% of the cost of gas-fired generation, and over 50% of the cost of coal. The levalised cost of energy (LCOE) of wind is already lower than coal and gas, and solar in the sunniest regions is on-track to beat the fossil fuels by 2020 or before. Citigroup concludes the cost gap will widen significantly in the years ahead - particularly in the time frame that the world is under pressure to act on climate change and transition to Clean Energy sources. Although the capital cost of wind and solar represent about 60% of their total costs, and half of the remainder is from financing, total costs are falling rapidly.
The analysis is supported by a recent IEA study that finds the cost of renewable sources can produce electricity at close to the cost of new fossil fuel-based power stations. Using LCOE, the IEA calculated the average cost of producing baseload power from traditional sources, such as nuclear, gas and coal was about $100 per megawatt hour (MWh) in 2015, compared to about $200/MWh for solar - down from $500 MWh in the 2010 edition of the IEA report. By 2025, the IEA believes large-scale solar installations will produce power at a cost below $100/MWh in the sunnier regions of the world.
Solar energy is growing exponentially – capacity has doubled every two years for the past 20 years and it is poised to accelerate as technology advances have driven costs lower, from $76 per watt in 1977 compared to less than $0.36 per watt today. Bloomberg New Energy Finance has projected that renewables will command just under 60% of the 9,786 GW of new generating capacity to be installed during the next 25 years - representing two thirds of the expected $12.2 trillion investment.
3. VALEANT: WORSE THAN HERBALIFE?
Scott Fearon, fund manager and author of one of my favourite books Dead Companies Walking writes on Valeant, drawing comparisons to the allegedly unethical and illegal behaviour of Herbalife. Both of which are held by Bill Ackman on the (very) long and short side respectively.
Last week, a single tweet sparked a major selloff in biotechs and pharmaceuticals. The Nasdaq biotech index fell over 4 percent Monday after Hillary Clinton tweeted about the steep price increase for Daraprim, which treats an obscure but serious parasitic infection. The drug was acquired by Turing Pharmaceuticals in August. Turing’s CEO, a 33-year-old ex-hedge fund manager, raised the price per pill of the medicine to $750 from $13.50. The day after her tweet, Clinton released a detailed plan to curb these apparent abuses of Medicare and Medicaid, which paid nearly $100 billion for prescription drugs in 2013, or about 35% of all retail drug spending.
Health care has, by far, been the best performing S&P industry sector this year, and the best performing stocks in it have been biotechs and pharmas. Clinton’s tweet sent every one of them down, evaporating tens of billions in market value. Especially hard hit were firms that sell prescription drugs addressing “orphan” illnesses, those that affect fewer than 200,000 Americans. One example is Vertex Bio’s Kalydeco. The FDA approved this pill in 2012 for use by roughly 1500 of the 30,000 Americans afflicted with cystic fibrosis. Kalydeco’s opening price was $290,000 a year. Less than a year after approval Vertex raised that to $307,000 a year, or $440 per pill (patients take two pills a day, for life). The cost to make each pill is probably under $4.
The company that has gotten the most negative press during this downturn is the $11 billion revenue giant Valeant (VRX). Valeant has a lengthy history of acquiring both prescription drugs and OTC products and charging more for them, often a lot more. Earlier this year, the Canadian-based company came under scrutiny for boosting the costs of heart drugs Isuprel 525 percent and Nitropress 212 percent on the same day it bought the rights to them.
Wall Street bulls, including most of the 20 analysts who cover Valeant, applaud its management’s “buy and burn” strategy of borrowing money (Valeant has almost $40 billion in debt), buying smaller firms, then firing the acquired company’s research staff while increasing prices. Some recent Valeant acquisitions – including Medicis in 2012, Obagi in 2013, and the bankrupt Dendreon in 2015 – sell drugs and products that are far from best in class. I know this personally. I visited the managements of all three companies at their corporate headquarters in the last decade.
If Valeant’s strategy isn’t illegal, it is certainly offensive. An argument could be made that it is the health care equivalent of the predatory lending industry, as it is forcing consumers, including the US government, to pay top dollar for much-needed products. More disturbing is the fact that many high profile hedge funds, including Bill Ackman’s Pershing Square, support this strategy. Pershing Square owns 19.5 million shares in the company, according to a recent SEC filing. Despite Valeant’s decline from $264 a share in July to $178 at yesterday’s close, that is still a whopping $3.47 billion investment.
For several years now, Ackman and Pershing have waged a public campaign against the allegedly unethical and illegal behaviour of another controversial company, Herbalife. I, too, have doubts about the efficacy of Herbalife’s products. The legality of its multi-level marketing practices is questionable, as well. But if Herbalife were to rapidly raise its prices, nobody’s life or wellbeing would be jeopardized, and American taxpayers wouldn’t be forced to pay exorbitant costs to enrich a Canadian corporation and its Wall Street enablers.
Congress should press on with its investigation of Valeant and other companies in the industry. Depending upon its findings, Medicare, Medicaid, and American consumers might consider boycotting Valeant’s products. At some point, the drug industry needs to know that consumers will no longer support companies that overcharge simply because they can.
4. INTERESTING LINKS
A $9 computer [Hacker News]; Missing story of the drug war [The New Yorker]; Indonesia provides “nice air” most of the time [Quartz]; Volatility from a phantom rate hike [PIMCO]; The economic case for roundabouts [Priceonomics]; Artistic algos [Quartz]; Anthony’s Bourdain’s world domination [Men’s Journal]; Book Excerpt: Carson Block on short selling [Institutional Investor]; Presentations from Sohn Conference [Market Folly]; The underground music scene in Saudi Arabia [Quartz];
5. JOKE OF THE WEEK
Tim Ferriss talks with Dilbert creator Scott Adams [The Tim Ferriss Show]
