Tag Archives: patents

America Inc. and its Moat

moat

Warren Buffett, the 21st century’s best-known investor, extols firms that have a “moat” around them—a barrier that offers stability and pricing power.One way American firms have improved their moats in recent times is through creeping consolidation. The Economist has divided the economy into 900-odd sectors covered by America’s five-yearly economic census. Two-thirds of them became more concentrated between 1997 and 2012 (see charts 2 and 3). The weighted average share of the top four firms in each sector has risen from 26% to 32%…

These data make it possible to distinguish between sectors of the economy that are fragmented, concentrated or oligopolistic, and to look at how revenues have fared in each case. Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%. And just under a tenth of the activity takes place in industries in which the top four firms control two-thirds or more of sales. This oligopolistic corner of the economy includes niche concerns—dog food, batteries and coffins—but also telecoms, pharmacies and credit cards.

The ability of big firms to influence and navigate an ever-expanding rule book may explain why the rate of small-company creation in America is close to its lowest mark since the 1970s … Small firms normally lack both the working capital needed to deal with red tape and long court cases, and the lobbying power that would bend rules to their purposes….

Another factor that may have made profits stickier is the growing clout of giant institutional shareholders such as BlackRock, State Street and Capital Group. Together they own 10-20% of most American companies, including ones that compete with each other. Claims that they rig things seem far-fetched, particularly since many of these funds are index trackers; their decisions as to what to buy and sell are made for them. But they may well set the tone, for example by demanding that chief executives remain disciplined about pricing and restraining investment in new capacity. The overall effect could mute competition.

The cable television industry has become more tightly controlled, and many Americans rely on a monopoly provider; prices have risen at twice the rate of inflation over the past five years. Consolidation in one of Mr Buffett’s favourite industries, railroads, has seen freight prices rise by 40% in real terms and returns on capital almost double since 2004. The proposed merger of Dow Chemical and DuPont, announced last December, illustrates the trend to concentration. //

Roughly another quarter of abnormal profits comes from the health-care industry, where a cohort of pharmaceutical and medical-equipment firms make aggregate returns on capital of 20-50%. The industry is riddled with special interests and is governed by patent rules that allow firms temporary monopolies on innovative new drugs and inventions. Much of health-care purchasing in America is ultimately controlled by insurance firms. Four of the largest, Anthem, Cigna, Aetna and Humana, are planning to merge into two larger firms.

The rest of the abnormal profits are to be found in the technology sector, where firms such as Google and Facebook enjoy market shares of 40% or more

But many of these arguments can be spun the other way. Alphabet, Facebook and Amazon are not being valued by investors as if they are high risk, but as if their market shares are sustainable and their network effects and accumulation of data will eventually allow them to reap monopoly-style profits. (Alphabet is now among the biggest lobbyists of any firm, spending $17m last year.)…

Perhaps antitrust regulators will act, forcing profits down. The relevant responsibilities are mostly divided between the Department of Justice (DoJ) and the Federal Trade Commission (FTC), although some …[But]Lots of important subjects are beyond their purview. They cannot consider whether the length and security of patents is excessive in an age when intellectual property is so important. They may not dwell deeply on whether the business model of large technology platforms such as Google has a long-term dependence on the monopoly rents that could come from its vast and irreproducible stash of data. They can only touch upon whether outlandishly large institutional shareholders with positions in almost all firms can implicitly guide them not to compete head on; or on why small firms seem to be struggling. Their purpose is to police illegal conduct, not reimagine the world. They lack scope.

Nowhere has the alternative approach been articulated. It would aim to unleash a burst of competition to shake up the comfortable incumbents of America Inc. It would involve a serious effort to remove the red tape and occupational-licensing schemes that strangle small businesses and deter new entrants. It would examine a loosening of the rules that give too much protection to some intellectual-property rights. It would involve more active, albeit cruder, antitrust actions. It would start a more serious conversation about whether it makes sense to have most of the country’s data in the hands of a few very large firms. It would revisit the entire issue of corporate lobbying, which has become a key mechanism by which incumbent firms protect themselves.

Excerpts from Too Much of a Good Thing, Economist, Mar. 26, 2016, at 23

Drug Markets, Patents and the Developing World; the HIV Virus

Sales of antiretroviral drugs in America and the five biggest European markets reached $13.3 billion in 2011, according to Datamonitor, a research outfit…. Publicly funded research has played a larger role in developing drugs for HIV than for other diseases. A study published last year in Health Affairs found that HIV drugs were three times as likely to involve a patent from the public sector. HIV also has special status among regulators. America’s Food and Drug Administration (FDA) created a faster way to review HIV drugs, allowing them on the market before the most expensive stage of clinical trials.

In total, public and private investment has yielded more than two dozen HIV drugs. In 1987 Burroughs-Wellcome (now part of GlaxoSmithKline) introduced the first one, tackling an enzyme that helps the virus progress inside human cells. In 1995 Hoffmann-La Roche, a Swiss drug firm, launched the first protease inhibitor, which interrupts the virus at a later stage of replication….One company stands out: Gilead, of California. A late entrant to the HIV race, Gilead quickly took the lead. Its strategy was simple: the more convenient the treatment, the better. In 2004 Gilead launched Truvada, a once-a-day, one-pill combination of two drugs. In 2006 it introduced Atripla, a once-a-day, one-pill combination of Truvada and another treatment. Atripla’s average wholesale price in America is nearly $25,000 per patient, per year. In 2011 its global sales reached $3.2 billion.  More good news for Gilead has come in recent weeks. An FDA panel recommended Truvada for preventive use: ie, to protect healthy people from contracting the virus. Another FDA panel endorsed Gilead’s new Quad pill, which is the simplest, most effective combination drug to date.

If the process for developing HIV drugs has been unusual, selling them has been even more so. America is the rich world’s biggest market, with 841,000 patients diagnosed—ten times as many as in Britain. More than 60% of HIV drugs in America are bought with public money. Insurers give HIV special treatment: patients are rarely pressed to buy the cheapest pills, as they might be if they had another disease.

Distributing drugs in poor countries is harder. A decade ago, hardly any poor people could afford them. At first, drugs firms handled this badly. In 1998, 39 big Western firms sued South Africa to protect their HIV patents. Global uproar ensued; the firms backed down in 2001.  Then two things changed. First, rich countries started donating vast sums to fight AIDS in poor ones. In 2000 there was less than $2 billion for HIV programmes each year; by 2010 there was $15 billion, thanks to the Global Fund to Fight AIDS, Tuberculosis and Malaria and George Bush junior’s President’s Emergency Plan for AIDS Relief (PEPFAR).

Second, the price of AIDS drugs plunged. In May 2000 a year’s “triple cocktail” therapy cost $10,000 or so. By 2011 the same pills sold for $62 in poor countries. PEPFAR cash buys generic versions of patented drugs, which may be supplied only to poor countries. Last year two drugmakers won most of PEPFAR’s contracts: Aurobindo, an Indian firm, and Matrix, an Indian firm acquired in 2007 by Mylan, an American one. PEPFAR’s bidding system keeps margins slim even by the standards of the generics industry, says Rajiv Malik, the president of Mylan. But volumes are huge.

Can treatment expand further? Despite the subsidies and the plunge in prices, less than half of those infected with HIV take HIV drugs. Those who do, however, live a long time, and they have to keep taking the pills. What’s more, new studies show that it helps to start treating patients early, so demand is sure to rise.  Alas, aid dipped in 2009 and 2010, thanks to the financial crisis. To make matters more complicated, there is a trade-off between more drugs and better ones. Most patients in poor countries get outdated pills, according to Médecins Sans Frontières. Allowing generics firms to copy yet more patented drugs might help. Since 2006 Gilead has licensed drugs to generics firms for 5% royalties. Last year it went further, agreeing to license drugs to a “patent pool” to centralise royalty deals for a range of firms. So far, however, Gilead is the only Western company to join….

There are two distinct HIV markets. In rich countries, many good treatments jostle for market share. The best will generate fat profits, since patients have to take their pills every day. But Datamonitor predicts that growth will slow after 2017, as many drugs lose patent protection and prices crash. In poor countries, by contrast, Big Pharma makes very little money but the most efficient copycats thrive. Meanwhile, the world still waits for a cure.

The business of HIV: Battling the virus, Economist, June 2, 2012,at 80

Is India Abandoning Legal Action against Biopiracy?

From the Press Release of Environmental Support Group Feb. 7, 2012

In a shocking development, the Karnataka State Biodiversity Board [India] has resolved in its 19th meeting held on 20th January 2012 that it will not prosecute institutions and companies who violate the Biological Diversity Act.This highly controversial and illegal decision was taken in the context of reviewing [Environmental Support Group] ESG’s complaint of biopiracy against Monsanto and its Indian subsidiary Mahyco who along with their collaborators (University of Agricultural Sciences, Dharwar; Tamilnadu Agricultural University, Coimbatore; Indian Institute of Vegetable Research, Lucknow; Sathguru Foundation, Hyderabad; United States Agency for International Development and Cornell University, New York) wilfully violated the provisions of the Biological Diversity Act by illegally accessing 12 varieties of brinjal endemic to India and genetically modifying it, resulting in a patented product – B.t. Brinjal. This constitutes biopiracy, a criminal violation punishable with prison sentences.

The resolution passed by the Board is as follows: “The subject was deliberated and it was clarified that the subject comes under the purview of the National Biodiversity Authority. Therefore, it was resolved that it is for the National Biodiversity Authority to take necessary action at their end against institutions/companies regarding alleged violations of provisions under Biodiversity Act 2002.”

There is little doubt that this controversial resolution was passed to unhook Monsanto and its collaborators from biopiracy charges. It is tenable to draw such a conclusion as the current action agitates against the consistent position held by the Board that ESG’s complaint of biopiracy has merit and action must be initiated against the violators per the advise of the National Biodiversity Authority….This retrograde decision flies in the face of an assurance given to Parliament by Smt. Jayanti Natarajan, Indian Minister of State for Environment and Forests, as recently as on 28 September 2011. The Minister had stated that “(b)ased on preliminary information placed before it, the National Biodiversity Authority has recommended in principle to initiate legal action against alleged violators for violation of various provisions of the Biological Diversity Act, 2002”. …

This is more than likely to encourage more cases of biopiracy by corporates and thus seriously compromise biodiversity heritage and the food and social security that it extends to millions. Further, it will allow the loot of our natural wealth for maximising corporate profits by agricultural, biotech and pharmaceutical companies, while irreversibly jeopardising the economic and ecological security of present and future generations.

Excerpts from PRESS RELEASE, Karnataka abandons obligation to prosecute violators of Biological Diversity Act, Environmental Support Group, Feb. 7, 2012