May 2008 Archive
If misery likes company then US car drivers have a lot of companions around the world who are suffering from even higher prices at the pump. As you stare at that sticker price of $4 a gallon, it is probably best to be too young to remember that between 1990 and 1995 gasoline averaged around $1.22 a gallon. (Oh, happy days).
While many oil-rich developing countries such as Iran, Saudi Arabia, Egypt, Burma, Malaysia, Kuwait, India, China, Taiwan, South Korea, Brunei, and Nigeria subsidize gasoline prices so that its citizens pay as low as 19 cents a gallon (in Venezuela) or 38 cents a gallon (in Nigeria), most developed oil-hungry states don’t have it so good. If you think $4 a gallon is bad in the US, how about $5.60 in Australia, or $8.56 in the UK, or $11 in Norway. Oh, and did I mention the $18.43 price in Sierra Leone (OK, it’s a developing country recovering from the chaos of a civil war, so strike that).
And why are drivers in these countries suffering more at the pump? In a word, taxes. In the US gas taxes (both federal and state) are relatively low and devoted to offsetting macro-transportation costs such as road building and maintenance. However, in densely populated Europe the fuel tax is used both as a longstanding source of general revenue and as a means to discourage driving and decrease pollution (by encouraging use of the extensive public transportation systems).
The US Department of Energy breaks down the costs of gasoline sold in the US as:
Crude oil: 52%
Refining: 24%
Taxes: 15%
Distribution and Marketing: 9%
So the drastic ramping up of crude oil prices in recent months to more than $130-a-barrel today is the main component in the spike in the price drivers pay at the pump. And despite the fact that Big Oil companies (such as BP, Exxon Mobil, Royal Dutch Shell, Chevron and others) stand under suspicion of price gouging, market manipulation, and excessive profit-taking, in this hot political season before national elections, the fact is that distribution and marketing and refining costs are relatively restrained.
When executives from the above listed companies were summoned before the Senate Judiciary Committee last week to justify their “windfall profits” the oil company executives contended that their record profits last year were in line with other industries. Far from a windfall, oil and gas companies earned an average of 8.3 cents per dollar of sales, compared with 7.8 cents per dollar for the Dow Jones Industrial Average.
Until the crude oil futures markets see a better balance between supply (not enough oil) and demand (too much usage), crude oil prices will stay high.
So what should US drivers do this summer?
(a) Grin and bear it?
(b) Drive less?
(c) Think of Norway?
(d) All of the above?
The answer is (d).
Do you suppose August Busch IV will be pulling up a stool with the other CEOs/chairpersons/heirs-to-the-family-fortune at an imaginary get-together in a dusty old corner tavern to drink to their multi-billion-dollar deals? Will he join these other recent sellers of giant companies and drink to the money they’ve made? Will Busch IV and the others also drink to the demise of the American family business dynasty? They probably should, at least to the former.
Here’s a short round-up of recent dynasty-related acquisitions: Wrigley sold its iconic gum company to candy company Mars; the Bancrofts sold Dow Jones (and with it, The Wall Street Journal) to Rupert Murdoch; and Carlsberg and Heineken have just taken over, dismantled, and divvied up the UK’s oldest brewer, Scottish & Newcastle. The beer arena has examples of other takeovers of family-owned and -run companies as well: South Africa’s SABMiller snagged Milwaukee’s finest, Miller Brewing, and Canada’s Molson bought out that mellow Denver brew, Coors (creating the not very creatively named Molson Coors Brewing Company). There are others but you get the drift — consolidation is all, especially in the beer market.
To this end, it sure looks like little Auggie Busch will be joining our group of seller (sell-outs?) for a drink. Rumors, reports, and Reuters are rife with talk about the sale of Anheuser-Bush to InBev. InBev? What’s that? Not a household name in this country (yet), InBev is a large Belgium brewer with operations in some 30 countries. It produces and markets some 200 beers throughout the world and makes some pretty well known quaffs you’ve probably quaffed — Beck’s, Stella Artois, Brahma, and Labatt, to name a few.
[Reader note: Instead of using past perfect, pluperfect, and other awkward tenses, let us assume this is a done deal, thus freeing us to use and read less convoluted verbal constructs: So, instead of, "August Busch IV is said to have rejected," let us say instead, "August Busch IV has so far rejected ..."]
As of this writing Busch IV has rejected InBev’s $46 billion offer to buy out his family’s legacy. Ever mindful of his father (Busch III) and all the Bs before him, not to mention his hometown of St. Louis, and perhaps even his company as an edifying example of the American Dream, Bush IV and A-B itself remain silent on any deal. InBev officially remains silent as well.
But $46 billion. It is a sum not to be sneezed at. Just what would Anheuser get for this tidy sum? Well, considering the flat sales in the mature US beer market, A-B would leverage InBev’s global and emerging market platforms, as well as its manufacturing, cost-saving, and scalability synergies. In short, A-B would probably see an increase in its bottom line.
And InBev — again, given the sluggish US beer market — what would it get? Given that some of its most successful operations are in Canada and South and Central America (through its Brazil-headquartered AmBev subsidiary), the company badly wants into the US market. What better way than to acquire Anheuser-Bush’s well established distribution system? InBev could market its more upscale beers in the US and do the same with Budweiser in its emerging (and already-emerged) markets.
It sounds like a pretty good deal all around. But the thought arises — will the Clydesdales now be draped in the black, red, and gold of the Belgian flag? I don’t even want to contemplate the Super Bowl ads.
Last week the Federal Aviation Administration (FAA) and the Federal Motor Carrier Safety Administration (FMCSA) decided that pilots, air traffic controllers, and truck drivers shouldn’t be allowed to work while taking smoking cessation drug Chantix due to a recent report that linked the drug to an increase in accidents (such as falls and traffic incidents) and a wide variety of maladies including dizziness, confusion, muscle spasms, diabetes, and heart problems.
The news comes as an added blow to Pfizer, which is counting on new drug releases like Chantix to save its bottom line in future years. The drug already carries warnings for several side effects, and sales have been negatively affected by publicity surrounding the drug’s psychiatric risks, especially after a much-publicized musician’s death and other reports of bizarre behavior that have been connected to Chantix.
The recent study, released by the Institute for Safe Medication Practices, is based on FDA adverse events reports and has prompted calls for increased (black box) warnings for the medication. Pfizer argues that the nearly 1,000 events reported during the fourth quarter of 2007 (out of some 5.5 million total prescriptions written) outlined in the study are still “infrequent” as the existing label implies.
This number ratio is higher, however, than all of the other drugs examined by the institute for that period, and most that come close already have black box warnings. The FDA is looking into Chantix’ psychiatric side-effects, as well as reports of drowsiness, but says that it likely won’t have the manpower to put behind an additional investigation.
Despite the FDA’s sluggishness, it seems inevitable that the agency will soon add black box warnings for many of the Chantix symptoms outlined in the study, as the drug is increasingly in the public spotlight. While this drug has reportedly helped millions drop a potentially life-threatening habit, the question remains whether the benefits outweigh the possibility of equally lethal side-effects. Certainly, actions taken by the FAA and FMCSA to ban the drug are understandable and will likely prompt scrutiny of the drug by other employers and patients.
Pfizer, on the other hand, has no plans to stop promoting the drug, which works to block the effects of nicotine on the brain, and is launching the drug in additional markets.
Can Jerome Kerviel be a rogue trader if he had accomplices, no actual oversight by his superiors, and a pervasive environment at the bank that, according to Kerviel, encouraged reckless trades?
To quote Inigo Montoya from The Princess Bride, “I don’t think that word means what you think it means.”
According to an internal report, supervisors at Societe Generale ignored 75 alerts that should have warned them that Kerviel was making unauthorized trades. As one source put it, “They had a 9 in 10 chance of discovering what was going on.”
Kerviel still faces criminal charges for trades that caused nearly $8 billion in losses at the French banking giant. These new allegations of lack of oversight by the bank mean more than just embarrassment for the company. Other employees could lose their jobs and the bank could face lawsuits by investors.
Although it’s fun to chant “rogue trader, rogue trader,” the reasons for the SocGen losses do not vary that much from the UBS debacle (nearly $40 billion lost) or the downfall of Bear Stearns. Lack of oversight on the part of SocGen, hubris at Bear Stearns, and an adolescent desire to play with the cool kids at UBS led to each bank’s embarrassing failures. In each case, everyone involved thought that the rules didn’t apply to them, that risk didn’t apply to them, that they could game the market. In each case, they found out otherwise.
It’s a funny thing about risk. Risk actually doesn’t change — only our interpretation of it does. When you get away with something for so long, it doesn’t seem that risky after a while. That’s not rocket science, that’s just human nature.
Well, maybe it’s rocket science too. Just ask NASA engineers in 1986 and again in 2003. Every successful launch leading up to the Challenger and Columbia disasters made officials and engineers accept more and more risk until the next tragedy happened (and will happen again, no doubt).
Maybe bankers should take a look at these disastrous failures and the culture that allowed them to happen and apply some of those lessons to their business. And maybe they should stop crying “rogue trader!” when it wasn’t just one trader and he wasn’t a rogue.
Are too few cancer drugs winning approval from the FDA? That’s the question Richard Pazdur, head of the agency’s oncology division, gets asked in an interview with BusinessWeek’s Catherine Arnst (via GoozNews).
Pazdur has been in charge of cancer drug approvals in the US since 1999 and has overseen some controversial decisions, most notably the agency’s 2007 refusal to approve Dendreon’s prostate cancer vaccine Provenge. Pazdur’s division denied marketing approval for the drug over the opposition of its advisory committee, a relatively rare occurrence; and the decision spurred a patient advocacy movement that has accused Pazdur of being overcautious and the committee of conflicts of interest.
A feature article accompanying the interview lays out some of the pitfalls of the approval process for cancer treatments, a process critics say is outdated and dominated by a sense of cautiousness that resulted from the 2005 safety scare over Merck’s Vioxx. Eighteen new cancer drugs have gone on the market since 2005, but investigational cancer drugs win approval at a much lower rate than other therapies (8% for cancer drugs versus 20% for other diseases).
Would-be reformers want an expedited approval process that includes more flexibility in clinical trial design and analysis, with the hope of getting potential life-prolonging drugs on the market faster. Pazdur, however, is far from convinced, likening some trends in data analysis (particularly the practice of salvaging failed drug trials by finding subsets of patients who responded to a drug) to finding an arrow that missed its mark “and then drawing a target around it.”
“We cannot approve drugs on the basis of emotion,” says Pazdur. “We can’t make drugs available at the expense of lowering standards of approval.” It’s difficult to argue with that logic. But it’s not likely to make cancer patients, or oncology-focused drug companies, feel any better.