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DLA Piper's Veramallay on launching a startup and expanding overseas: NY vs California
FinTech
<p>Shayne Veramallay, venture pipeline manager for DLA Piper, says New York is a great jumping point for international investing in startups -- but lags the West Coast in its connection to Asia.</p> <p>Veramallay will be part of a New York City panel on November 18 discussing startups seeking to raise funds and go global in Asia. For more information and registration, follow this link here.</p>
Healthcare hedge fund calls Valeant pricing 'outrageous' while recommending Horizon
Hedge Funds
<p>At this moment, there are significant investing opportunities in healthcare, Jim Flynn of Deerfield Partners said at the Invest for Kids Conference in Chicago Wednesday. Yet Valeant Pharmaceuticals is not one of them, he emphatically asserted as he outlined a potential relative value trade when he recommended a long investment in Horizon Pharmaceuticals.</p> <p>Chart via S&amp;P CapIQ<br /> Flynn: Valeant pushes financial structuring to its limit and pricing issues are more a statement on individual companies than pharma industry as a whole<br /> Deerfield Partners is a well-regarded healthcare specialty hedge fund that has delivered to investors 38 times their original investment since their founding in 1994. Flynn, the current managing director of the New York-based fund, surveys today’s specialty pharmaceutical investment environment that has been devastated by scandals at Valeant and Turing Pharmaceuticals, connects dots to pharma’s history with the U.S. government and doesn’t see a pretty picture ahead.</p> <p>The issue that investors should not focus on, however, is the issue that is currently top of the news.  Flynn said the pharmacy distribution issues that is currently at the center of the Valeant scandal is not the ball investors should focus on. “Don’t spend too much time on how product is distributed but more to the point drug pricing,” Flynn explained, saying leverage and sustainability were the real issues that are not much discussed. Valeant is a one off, an industry bad boy that “pushes some of its financial structure to its absolute limit.Philidor is more a statement on that firm’s internal controls than industry in general,” he said.<br /> Flynn: Drug pricing issue is “outrageous” and won’t go away unless specific companies change their pricing policies<br /> What is material to the entire healthcare industry is price gouging. Flynn anticipates if practices don’t change, pricing along with tax haven issues will be dealt with severely by government, staring with Congressional hearings over the next month, along with tax haven issues. “This is not going away” as a political issue, he said.</p> <p>To understand the significance of today’s health care issue and forthcoming government scrutiny is to look back in history to last time the pharmaceutical industry came under intense political pressure. The year was 1993 and Congress was livid, led by Sen David Pryor (D-AK), as drug prices had risen by 15 to 20 percent. This led to Congressional pressure and ultimately an agreement from the pharma concerns that they would limit price increases in line with general inflation, Flynn stated, which at the time was considered beneficial to the pharma industry.<br /> Flynn points to the key argument that swayed regulators is one that rings hallow today. In 1993 the argument that higher drug prices were required to fuel research and development ultimately won the day for pharma. Flynn notes that given the current situation, where drug roll-up companies raise prices to improve profits and slash research and development, he expects Congress to take tough action. He notes that Valeant raised drug prices on 85 drugs by 24 percent on average in the last year while spending much less than average companies on drug development and almost nothing on drug discovery. Led by firms such as Valeant and Turing Pharmaceuticals, who raised prices by 5,000 percent on a lifesaving drug, Flynn calls the current drug price increases “historic and outrageous,” not in line with the drug manufactures 1993 pledge to keep price increases in line with inflation.<br /> Drug companies moving tax authority off shore is a double edged sword that will also be dealt with, he anticipates. Raising drug prices increases the costs for Medicare and Medicaid while offshoring profits takes away government revenue to fund these programs. In the end the math doesn’t work and something will have to give, Flynn.<br /> Flynn: Valeant has patent and leverage issues and is paying down outstanding debt is only one potential path, many of which are negative<br />
The yanks are coming as European banks re-trench
Capital Markets
<p>&nbsp;</p> <p>News comes from Europe almost every day that suggests European banking is changing fairly radically. The change is being driven by an entirely new political climate.</p> <p>For as many years as I have studied banks (going on half a century now), European governments have coddled their banks and used them as props for establishment politicians and their supporters. As part of that system, sovereigns have in practice guaranteed the liabilities of their banks and regulators have gone easy on capital requirements. Circularly, the banks also have financed the sovereigns.</p> <p>Basel I (adopted in 1988) supposedly required 8% capital, but the definition of risk-weighted assets allowed, by design, very low capital ratios against gross assets. Basel II (implemented in Europe in 2002) was designed by the banks to fool the regulators; it was embraced wholeheartedly by big banks everywhere; and it played a role in stoking the real estate booms of 2003-2006 that caused the busts of 2007-2009. (European banks played a significant role in the U.S. boom as well as the Irish, Spanish and English incidents.)</p> <p>European governments finally have got the message that guaranteeing the nation’s banks’ creditors can be dangerous to the nation’s financial health. See Ireland (contrast Iceland), Spain, Belgium, Greece, Cyprus, for examples. That gradual recognition led to adoption of Basel III (2010 but still being implemented gradually), which imposes the first real capital requirements on European banks. Now governments have recognized that banks need to have capital in order to survive when economic times get tough. And that has led to the ECB becoming the euro area regulator of large banks and to the ECB applying stress tests to bank capital.</p> <p>Evaluating bank capital on a forward-looking basis (which is what stress tests do) makes “all the difference”, as Robert Frost said about taking the road less traveled. A forward look at capital that includes a significant recession shows which bank activities are likely to lead to losses. Tested banks then must either curtail those activities or keep more capital against them.</p> <p>When banks see the amount of capital that an activity really needs, they typically find that their internal allocations have been made with rose-colored glasses. Therefore we see Deutsche Bank, Barclay’s, the Swiss banks, and many others reevaluating their business plans and changing their managements, hopefully to find managers who are capable in the new world of capital and technology.</p> <p>Yes, I just threw in technology, as anyone reading about Deutsche would have to do. Both the need for management to understand technology better and the need to allocate capital more realistically require entirely different mindsets from those that have prevailed in most European banks. Indeed, until recently, in most U.S. banks as well. I recall a fairly large bank CEO asking a few friends (of whom I was one) what he should be investing in—this was about 15 years ago. I said software. He pooh-poohed that idea. Marketing was what interested him. Market share was what interested him.</p> <p>What will these changes mean for Europe’s economy? My guess is that stress-tested banks that must have real capital are going to be more cautious lenders. That means the capital markets will have to become more robust—and it is the American banks are best positioned to lead those capital markets.<br /> Photo: WordShore</p>
Apple maintains a competitive advantage in consumer payments
FinTech
<p>What is the natural cost of a consumer payment? Close to zero. Electronic signals are almost costless. Once in place, verification systems are low upkeep. Fraud costs something, and someone other than the consumer has to cover that. Whether payment is from an account or as credit seems irrelevant.</p> <p>Costs of course will not be zero and providers will naturally want to charge whatever they can for the service. But JPMorgan Chase coming out with its own system and undercutting Apple Pay by offering more to merchants shows how competition will work here, as it has worked in every other electronic system. Think about a phone call or a stock transaction or an email or text—the costs keep being driven down.</p> <p>That does not make JPMorgan Chase wrong to start its service. The payments system is one of the most profitable parts of banking. The large banks have to try to defend their franchise, and consumers will benefit the most from the competition.</p> <p>The WSJ recently  wrote about this subject, fairly intelligently for the most part. But then it threw in this clunker:</p> <p>J.P. Morgan has already lined up a huge group of merchants, including Wal-Mart and Best Buy to accept payments through its technology. How the bank won this business is instructive: The fees for Chase Pay transactions will be lower than for payments made with traditional methods such as debit and credit cards. That effectively means J.P. Morgan is willing to cannibalize profits from its traditional payments business to win market share.</p> <p>While that can be painful, it is less so for banks. They can offset lower fee income with what they make lending money. The same largely isn’t true for tech rivals. As the struggle heats up, it is likely anyone who wants to be a big payments player will have to offer increasingly expensive incentives to merchants and consumers.</p> <p>What I am focusing on here is the notion that banks can make up for lower fee income by making more on loans. If anyone has been around banking for more than a few years, they will remember that the search for fee income came about because banks were not sufficiently profitable based solely on the spreads they earned. And lending is a dangerous business because it is pro-cyclical. It makes money when times are good and loses money when times are bad. Fee income is less cyclical and therefore provides a suitable balance to spread income.</p> <p>Have the WSJ writers forgotten this history? Or do they think that lending has changed? Whatever the reason, there is no difference between the profit per transaction for a bank or for a non-bank. Both have to use capital to create the system they use and both have to operate the system. Profit for either depends on cost per transaction, what they charge per transaction, and volume (crucially, volume). The conglomeratization of a bank through its several business lines or Apple through its far broader set of business lines or of PayPal through its narrower set of business lines is irrelevant. All the players will drive costs as close to zero as they can, and all will compete for business by charging consumers as little as they can while earning profits. The advantage that Apple has is that it sells the phones that originate the transactions; therefore it potentially benefits not only from Apple Pay transactions, but also from everyone else’s transactions that are originated using iPhones—and maybe the iWatch even newer devices as well.<br /> Photo: LWYang </p>
A vehicle fit for a villain
Lifestyle
<p>An Aston Martin may be your ride of choice if you are looking to play the hero but we all know nice guys finish last, especially if you are racing against this orange Jaguar C-X75. The car recently starred as the villain's ride in the newest Bond film "Spectre".</p> <p>The Jaguar, Business Insider reports, is driven by henchman "Mr. Hinx" during a high-speed chase with Bond's bespoke Aston in Rome.</p> <p>The hybrid-electric, two-seat concept car originally debuted at the 2010 Paris Motor Show. Sadly -- despite its appearance in Spectre -- the C-X75 remains a concept car, so don't expect to see it in your local showroom anytime soon. Jaguar Land Rover Special Vehicle Operations chief John Edwards recently told the UK's Autocar there are no plans for production:<br /> “The film was an opportunity to showcase C-X75, but it doesn’t mean a change in strategy. The decision has been made and we can hold our heads up high on that,”<br /> At least you can you still get a glimpse on the big screen.</p> <p>Photo: Jaguar Land Rover</p>
What we're reading: The China enigma and the true meaning of happiness
Lifestyle
<p>This week we get to grips with two of the greatest complexities in the world today: Chinese politics and Syrian alliances. Elsewhere, Alibaba’s founder gets all zen about the meaning of happiness and privacy gets passe.</p> <p>Why China is a black box. “A riddle, wrapped in a mystery, inside an enigma” is a term that was first used by Winston Churchill to describe Russia, but perhaps China also fits the description. Business Insider. </p> <p>The absurdly complex web of allies and enemies in Syria. Ever been confused as to who is exactly backing whom in Syria? You are not alone. This amazing interactive infographic illustrates just how complex things are out there, but it probably won’t make you any less confounded.  Quartz </p> <p>Money didn’t bring me happiness, says Alibaba’s Jack Ma. China’s most successful internet entrepreneur says his happiest days were when he was a dirt poor teacher. Tech In Asia</p> <p>Is the U.S, going soft on China? The recent excursion to the South China Sea by the U.S. Navy was intended to be a show of force, but it may not have had the desired effect. Financial Times (paywall) </p> <p>Privacy is sooo last century. For most of human history, people lived with little or no expectation of a private life. So the new normal, where everyone knows your business, is perhaps not so new. Guardian<br /> Photo: Gabriela Pinto</p>
China foreign reserve boost allays yuan depreciation fears
Capital Markets
<p>It appears that fears of an increasingly devaluing Chinese yuan could be dying down – for now. </p> <p>The Wall Street Journal reports that China's five-month run of capital outflows came to a sudden halt this week with news that the country's foreign-exchange reserves swelled in October – by $11.39 billion to $3.526 trillion – helping shore up its currency. Capital Economics economist Julian Evans-Pritchard told the Wall Street Journal:<br /> “We think these outflows are now reversing because market expectations for significant [yuan] depreciation have now eased after PBOC (People’s Bank of China) intervention helped stabilize the currency and expectations for U.S. rate hikes have been pushed back.”<br /> However, recent statements from the U.S. Federal Reserve have already made it seem more likely a hike will take place in December, potentially triggering more outflows, or at least the need for more intervention from the PBOC.</p> <p>Photo: Karl Baron</p>
China and Taiwan: A tale of two press conferences
Capital Markets
<p>If China and Taiwan’s historic meetup in Singapore has taught us anything it’s that Beijing is as fightened of Taiwan's free speech as Taipei is of China's missiles. </p> <p>Quartz points out that while the countries share a language, history, and economic interests, a big difference could be seen in how each approached the political press conferences that followed back in their respective territories. </p> <p>As Taiwan’s democratically-elected president Ma Ying-jeou fielded several awkward questions from the country's free press – mostly about Chinese missiles aimed at Taiwan – China’s Xi Jinping offered a prepared statement and answered just three scripted questions from press outlets sympathetic to Beijing. </p> <p>What’s more, mainland broadcaster CCTV offered only edited highlights of the Taiwan conference, lest viewers be exposed to anything more explosive than a Chinese ballistic.<br /> Photo: Jennifer Moo</p> <p>&nbsp;</p> <p>&nbsp;</p>
The Week Ahead: Eurogroup meeting looms, China and Japan release trade data
Capital Markets
<p>As the week kicks off all eyes will be on Brussels as Monday evening's Eurogroup Meeting gets underway. Eurozone finance ministers are expected to approve the disbursement of a first sub-installment of 2 billion euros to Greece. The European Central Bank’s (ECB) Mario Draghi will also speak on Wednesday, hopefully shedding more light on how the ECB will step up its stimulus program. </p> <p>With the Federal Reserve’s December interest rate hike looking all but certain, investors will also be focused on the deluge of country data coming out this week.  China, Japan, and Germany will all be releasing trade balance data, while important jobs data will be coming out of the U.S. and the U.K. </p> <p>Here’s what you should expect this week:</p> <p>&nbsp;</p> <p>Monday, November 9 </p> <p>08:30 Australia ANZ Job advertisement (Nov, MoM) – Previous: 3.9%</p> <p>15:00 Germany Trade Balance (Sep) – Forecast: 15.3bn ;Previous: 21bn</p> <p>22:00 Eurogroup Meeting </p> <p>23:00 U.S. Labor Market Conditions Index</p> <p>&nbsp;</p> <p>Tuesday, November 10</p> <p>&nbsp;</p> <p>07:00 China Exports (Oct, YoY) – Previous: -3.7%; Forecast: -3.2%</p> <p>07:00 China Trade Balance (Oct) – Previous: 60.34bn; Forecast: 62.17bn</p> <p>07:00 China Imports (Oct, YoY) – Previous: -20.4%; Forecast: -15.2%</p> <p>07:00 India Exports (Oct, YoY) – Previous: -24.3%</p> <p>07:50 Japan Current Account (Sep) – Previous: 1653.1bn; Forecast: 2180.1bn </p> <p>07:50 Japan Trade Balance, BOP Basis – Previous: -326.1bn; Forecast: 82bn </p> <p>09:30 China CPI (Oct, YoY) – Previous: 1.6%; Forecast: 1.5% </p> <p>23:00 Import Price Index (Oct, MoM0 – Previous: -0.1%; Forecast: 0.1%</p> <p>&nbsp;</p> <p>Wednesday, November 11 </p> <p>07:30 Australia Westpac Consumer Confidence (Nov. MoM) – Previous: 4.2%</p> <p>13:30 China Industrial Production (Oct, YoY) – Previous: 5.7%; Forecast: 5.8%</p> <p>17:30 U.K. unemployment Rate 3m (Sep) – Forecast: 5.4% (unchanged) </p> <p>17:30 Jobless Claims Change (Oct) – Previous: 2k; Forecast: 4.6k</p> <p>21:15 ECB’s Draghi Speaks</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>Thursday, November 12 </p> <p>08:30 Australia Employment Change (Oct) – Previous: -5.1k; Forecast: 15k </p> <p>08:30 Australia Unemployment Rate (Oct) – Forecast: 6.2% (unchanged)  </p> <p>15:00 Germany CPI (Oct, MoM)</p> <p>15:00 Germany CPI (Oct, YoY) – Forecast: 0.3% (unchanged)</p> <p>18:00 Europe Industrial Production (Sep, MoM) – Previous: -0.5%; Forecast: -0.1%  </p> <p>18:00 Europe Industrial Production (Sep, YoY) – Previous: -0.9%; Forecast: 1.3%</p> <p>21:30 U.S. Initial Jobless Claims (Nov) – Previous: 276k</p> <p>23:00 U.S. JOLTS Jobs Openings (Sep) – Previous 5.37m</p> <p>23:15 Fed’s Evans Speaks</p> <p>Friday, November 13 </p> <p>01:15 Fed’s Dudley Speaks </p> <p>03:00 U.S. Monthly Budget Statement (Oct) – Previous: 91.1b; Forecast: -130b</p> <p>12:30 Japan Industrial Production (Sep, MoM) – Previous: 1%</p> <p>15:00 Germany GDP (3Q, QoQ) – Previous: 0.4%; Forecast: 0.3%</p> <p>15:00 Germany GDP (3Q, YoY) – Previous: 1.6%</p> <p>18:00 Europe GDP (3Q, QoQ) – Forecast: 0.4% (unchanged)</p> <p>18:00 Europe GDP (3Q, YoY) – Previous: 1.5%; Forecast: 1.7%</p> <p>21:30 U.S. Retail Sales (Oct, MoM) – Previous: 0.1%; Forecast: 0.3%</p> <p>23:00 U.S. UoM Confidence Preliminary – Previous: 90; Forecast: 91</p> <p>&nbsp;<br /> Photo: European Parliament</p>
Barron's Weekend Roundup: GM has 40% growth potential
Capital Markets
<p>&nbsp;</p> <p>General Motors is rolling strong. GM's third quarter earnings beat expectations, but the stock is only up 2% this year, reports Barron's. Across the U.S. car sales have been on the rise, and GM has been able to cut costs with more efficient manufacturing. The stock has potential to grow by 40%, Barron's argues.</p> <p>Platform Specialty Products is looking for a rebound with the help of high profile investors, including Bill Ackman. Platform, which went public in 2014, has seen its shares drop 60% since June. But the stock could rebound in the next 12 months, reports Barron's. The firm has closed four acquisitions and has lined up two more deals.</p> <p>&nbsp;<br /> Photo: jm3 on Flickr<br /> &nbsp;</p>