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Remdesivir and Transfer Pricing Part II

Remdesivir and Transfer Pricing Part II

Now that I sketched out the transfer pricing for Gilead Sciences with respect to their successful HIV and Hep C products (as much as I can say based on publicly available information), it is time to speculate a bit on how Remdesivir may play out. There is a lot we do not know including whether this treatment receives regulatory approval and how it will be priced if it does. Note for example this story:

More than 150 organisations and individuals on Monday urged US biotechnology firm Gilead not to enforce exclusivity over a drug that might be used to treat COVID-19 patients. In an open letter, 145 non-governmental organisations, including Doctors Without Borders (MSF) and Oxfam, and 12 individuals claimed Gilead Sciences held primary patents of remdesivir in more than 70 countries. That meant they could block generic development of the drug until 2031. The open letter to Gilead chief executive Daniel O’Day was circulated by MSF. “We write to request that Gilead take immediate actions to ensure rapid availability, affordability and accessibility of its experimental therapy remdesivir for the treatment of COVID-19, pending the results of the clinical trials demonstrating its efficacy,” it said.

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Credit Spreads: Comparing COVID-19 to the Collapse of Lehman Brothers

Credit Spreads: Comparing COVID-19 to the Collapse of Lehman Brothers

On March 18, Reuters noted something I have been following of late:

Concerns about the impact of the coronavirus on corporate America’s balance sheets has tripled the premium investors are demanding to hold even the highest-rated corporate bonds. The difference between the average yield of investment-grade U.S. bonds over virtually risk-free Treasuries widened to 303 basis points (bps) on Wednesday, according to the ICE/BofA investment grade index. That’s up from 101 bps at the start of the year and the highest since July 2009, For riskier high-yield securities, the average spread over Treasuries on Wednesday was 904 bps, the highest since October 2011, and more than 2-1/2 times the rate at the start of the year, using the ICE/BofA high-yield index … This hit to earnings has come at a time when U.S. corporate debt is near all-time highs, as is the size of the so-called triple-B segment of the market – companies one notch above junk status.

The spread between long-term corporate bond rates with credit rating BBB and long-term government bond rates jumped very quickly to almost 4%, which was not quite as high as the 5% or more spreads observed after the collapse of Lehman Brothers. FRED provides a series entitled ICE BofA BBB US Corporate Index Option-Adjusted Spread that dates back to 1997 when this spread was modest. It hit sort of a tidal wave during the turn of the millennium with the collapse of the internet/computer/telecommunication boom and a host of notorious bankruptcies. What happened after the collapse of Lehman Brothers was a tsunami. I did find some Thomson Reuters discussion entitled the implications of the credit crunch for intercompany loans, which talked about market interest rates as of February 2009:

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Remdesivir and Transfer Pricing

Remdesivir and Transfer Pricing

Gilead Sciences is conducting phase III trials to explore whether this treatment – which did not turn out to be effective against Ebola – might be effective in treating COVID-19. We all hope it will be and if it does pass phase III trials, national income tax authorities will later have to address the transfer pricing implications of any profits Gilead Sciences generates. This blog post is the first of two with this one setting up some basic transfer pricing principles by noting Gilead’s previous wonder treatments – its recent successes in treating Hepatitis C and its HIV treatments introduced a generation ago. My next blog post will discuss Remdesivir. Gilead was first to market with a treatment they called Sovaldi, which was their Hep C treatment based on sofosbuvir developed through phase II clinical trials by Pharmasset in 2011 for $11 billion. While Gilead was hopeful that its phase III efforts would lead to a successful and highly profitable treatment, the market place in 2011 worried that they had overpaid for an unproven treatment, which could also have competition. Matthew Herper noted in 2014 how this product launch did incredibly well after a rather fast process of obtaining regulatory approval in the U.S.:

Gilead’s launch of Sovaldi is looking like the fastest drug launch ever. Hepatitis C afflicts an estimated 3 million Americans. The chart below, from ISI Group analyst Mark Schoenebaum, tracks the number of Sovaldi prescriptions written by doctors according to data tracker IMS Health (this is labeled as TRx) against the launch of Vertex’s Incivek, another hepatitis C drug that was until now the fastest drug launch ever, and against the combination of Incivek and Merck’s competing drug, Victrelis. Schoenebaum also draws in his own forecast of what Sovaldi would have to do to reach $5 billion in sales in its first year on the market. That’s right — I said $5 billion. And Sovaldi (the red line) is way, way ahead of that forecast. In fact, the prescription numbers seem to be going straight up. There are still reasons some investors might question Gilead’s valuation. It may be that there are fewer hepatitis C patients than drug companies and public health officials think. It may be that Gilead gets blowback for the high cost of the drug — $84,000 per course. It may be that other entrants, from AbbVie or Merck, for instance, will prove good enough or inexpensive enough to take market share or even force a price war. It’s possible that insurance companies will push back.But having a product that is selling fast is a good problem to have.

 

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Europe’s Response to Coronavirus and the Implications for the U.S.

Europe’s Response to Coronavirus and the Implications for the U.S.

As I listened to the morning news about the coronavirus crisis, I was reminded of this critique of the Eurozone:

In a recent conference, the distinguished economist Paul Krugman repeated the oft-heard critique that the eurozone is not an optimal currency area. Waltraud Schelkle disagrees with this characterisation, and argues that no country or group of countries represents an optimal currency area – one region or country always loses out from a single monetary policy. But countries can use fiscal, social and regulatory policies to overcome these difficulties. When Americans criticise the eurozone’s currency policies, she writes, they are forgetting the US dollar’s shaky start and the adjustments which had to be made to the financial system in the 19th century.

Why mention the optimal currency area debate in reference to this health crisis? This morning I heard statements like this one:

By contrast, the coronavirus crisis has started to look more like the European migration and financial crises: a symptom of globalization that can’t be held back where it started. The exploding outbreak around the Continent — officially declared a pandemic by the World Health Organization on Wednesday — highlights both the promises and limitations of the European Union: a single, largely borderless market made up of 27 countries, each with their own governments, electorates, bureaucracies, health care systems and, as has become painfully obvious, national interests. For weeks, officials in Brussels and national capitals have called for pan-European coordination. Yet even as Italy, the bloc’s third largest economy, embraces a made-in-China solution — putting the entire country under preventative lockdown — the modus operandi across the EU remains fragmented and reactive.

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Trump Brags About Record Defense Spending

Trump Brags About Record Defense Spending

Niv Elis covers the latest in the Trump fiscal fiasco:

President Trump on Friday signed two spending packages totaling $1.4 trillion, averting a government shutdown at midnight. The bills included all 12 annual appropriations bills for the 2020 fiscal year that started Oct. 1. They also included a slew of tax cuts, extending expiring and expired tax breaks and eliminating other taxes that amount to an additional $426 billion in lost revenue, bringing the total cost of the bill to more than $1.8 trillion.

Reagan used to complain about “tax&tax and spend&spend” so he replaced it with spend&spend and borrow&borrow. Trump is doing the same but there’s more:

Trump’s signature brings to a close a fraught year for spending. At the same time last year, his refusal to sign a stopgap measure over funding his proposed border wall led to a 35-day shutdown, the longest in the nation’s history. The Democratic majority in the House, which was seated in the midst of the shutdown, left Trump with little to show for the shutdown by way of wall funding. After finally striking a deal to reopen the government in February, Trump proceeded to declare a state of emergency along the Southern border to allow him to reprogram other funds. Not long after, Trump released his annual budget proposal that would have hyper-charged military spending while dramatically cutting domestic spending, slashing more than 20 percent of funds from the EPA, State Department, and Transportation Department, and abolishing funding for popular programs such as the National Endowment for the Arts, the Corporation for Public Broadcasting and the Special Olympics. Congress summarily dismissed the request and ultimately agreed to a deal that would increase spending on both defense and non-defense significantly for both 2020 and 2021. Congressional leaders would need two stopgap measures spanning nearly three months to work out spending allocations, find compromises on controversial issues such as the wall and agree on additional legislation to include in the package.

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Exaggerated Benefits for U.S. Farmers from the China Trade News

Exaggerated Benefits for U.S. Farmers from the China Trade News

How gullible is Reuters?

China will likely hit $50 billion in purchases of U.S. agricultural products, U.S. President Donald Trump said on Friday after earlier announcing that he would roll back scheduled tariffs on Chinese imports as Washington and Beijing finalized an initial trade deal.

That was their opening paragraph. Fortune had a different take:

The Markets Have Spoken: Phase One Trade Deal Between the U.S. and China Is “No Victory” – From Shanghai to London, stocks rallied on Friday morning as a “Phase One trade deal” was reached between China and the Trump Administration—that is, until the details were announced. By noon in New York, the major indices still trading were swooning, with the S&P 500 and Dow Jones Industrial Average in negative territory, ceding big early gains. What happened? … Later in the day, the markets’ exuberance was largely dashed by what’s not in the deal. “I think we’re pretty much where we were in May,” says Usha Haley, W. Frank Barton distinguished chair in international business and professor of management at Wichita State University.

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Liz Cheney Loves Traitors

Liz Cheney Loves Traitors

Dick Cheney lied a lot so I guess his daughter feels compelled to do the same:

So I would just ask people to remember that they have failed despite the fact that they had a process that basically put everything tilted in their direction. The Democrats were able to act as judge and prosecutor. The Democrats were able to select every single witness. The Democrats were able to prevent, and did prevent, witnesses from answering Republican questions. The Democrats decided what the American people would see and when. The Democrats decided the timing on the release of important pieces of transcripts, they still have not released the transcript of the IC Inspector General, and so the Democrats essentially stacked the deck in their favor and despite the fact that they did this, and even with every unfair advantage and unprecedented advantage they gave themselves, including preventing the President from having any access to the proceedings, preventing his counsel from having any participation in the proceedings, they now have come out of this and fundamentally failed to prove their case.

My Lord – more whining about the process? And yes the case was proven overwhelmingly. There is a lot more BS in her little rant but who gives a damn what she said. Why is she defending a traitor? Oh wait PlameGate:

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The Current State of the U.S. Dairy Industry

The Current State of the U.S. Dairy Industry

 I had to endure a discussion of the plight of American dairy farmers where Trump’s trade policies were somehow to blame. Stephanie Mercier confirmed some of the facts:

According to data reported by the National Farmers Union (NFU), the average dairy farm has shown a positive net income only once in the last decade, in 2014. In 2018, the average value of production exceeded the total cost of producing each hundredweight of milk in only one state, California, and nationwide, dairy farmers lost an average of $3.21 per hundredweight of milk produced. For 2019, total dairy production is expected to increase modestly over 2018, by less than 0.3 percent, and the average all-milk price is expected to increase as well, from $16.26/cwt in 2018 to $18.40/cwt. While the projected 13 percent increase in price for this year is welcome news for U.S. dairy farmers, that level still falls below the average total cost of production for farmers in most of the country.

But she had a very different take on the international issues involved:

This situation is largely a result of a persistent mismatch between the supply of dairy products and the demand for them, and is not isolated to the U.S. domestic market. Within the European Union, low dairy prices prompted some Italian, German, and Belgian producers to dump their product in protest during the summer of 2019. The combination of low prices and a severe drought in 2018 has pushed many Australian dairy operations to the brink of collapse. The farmer-owned Fonterra dairy cooperative, serving both Australia and New Zealand farmers, has seen its share values decline by about 50 percent since the beginning of 2018.

Look – we can criticize Trump’s stupid trade war for a lot of things but low milk prices are being driven by other factors:

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Bicycles and Wine Tariffs

Bicycles and Wine Tariffs

Jeffrey Frankel has a must read blog over at Econbrowser:

The “bicycle theory” used to be a metaphor for international trade policy. Just as standing still on a bicycle is not an option — one has to keep moving forward or else the bike will fall over – so it was said that international trade negotiators must continue to engage in successive rounds of liberalization, or else the open global trading system would be pulled down by protectionist interests. I don’t know if the theory was ever right. (And, to be honest, I don’t entirely understand why forward movement keeps a bicycle from falling over.) But if we had stood still on trade policy over the last three years we would be a lot better off than where we are now.

It may be cold in New York City but after all that Thanksgiving wine, maybe a bicycle ride is in order. Just after that infamous phone call with the President of Ukraine, Trump opined on trade policy regarding wine:

Mr Trump, who is teetotal, said: “I’ve always liked American wines better than French wines. Even though I don’t drink wine. I just like the way they look.” The US is the world’s largest consumer of wine and the largest import market, with France consistently among the top origin countries for imported wine.

He was angry over something called the digital sales tax but here is a more related reason for this weird tweet:

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Have the Transfer Pricing Experts at KPMG Heard of the Repo Ruckus?

Have the Transfer Pricing Experts at KPMG Heard of the Repo Ruckus?

If one thinks Trump’s economic advisors are the dumbest people on the planet, I have a new candidate for that award – a few supposed experts on intercompany loans that work for KPMG:

In 2017, the ARRC selected the Secured Overnight Financing Rate (SOFR) as the alternative that represents the best replacement rate for USD-denominated LIBOR. SOFR is based on overnight transactions in the U.S. dollar Treasury repo market, the largest rates market at a given maturity in the world … In the time since the Federal Reserve Bank of New York began daily publication of SOFR in 2018, significant progress has been made in building liquidity in SOFR-linked markets (which include dollar-based derivatives and loans) … SOFR is fundamentally different than LIBOR in a number of key elements. SOFR is (currently) an overnight rate, is secured and is designed to reflect a (virtually) risk-free rate. LIBOR has forward-looking term options, is unsecured and is designed to reflect a bank’s cost of funding. All of these characteristics factor into how SOFR will perform under certain circumstances and how it can be used by market participations. For example, the following figure compares 3-month LIBOR, one the most commonly used LIBOR benchmarks, to the 3-month simple average of SOFR. SOFR is generally both lower and, depending on the methodology applied to derive a term structure, less volatile as compared with LIBOR. This is to be expected given the lower risk profile of SOFR, since it represents borrowings collateralized by U.S. Treasury securities while LIBOR reflects interbank credit risk.

The purpose of their ramblings was to advise multinationals on what to do with a set of their intercompany loans once LIBOR disappears, which is sort of making an easy issue hard so their arrogant and overpriced clowns can charge lots of fees for virtually nothing. But hey – that is what the Big Four does.

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