Thursday, August 28, 2008

Happy Birthday, Mac!

Apple's Macintosh computer turns 25 in January.

Recently, O'Reilly News interviewed Andy Hertzfeld, an original designer. While he discusses fascinating points, it's the sheer change between now and then that's got us gobsmacked – not just for Mac itself, but the industry as well.

If we put ourselves in 1959 (25 years earlier), would there have been any possibility of imagining what subsequently transpired? This was even three years prior to the first work on ARPANET, the Internet's rudimentary predecessor, which researchers did not activate until 1969.

Is there any possibility today?

The original Mac – remember the 1984 Super Bowl? – featured 128 kilobytes of RAM. It came bundled with two applications, MacWrite and MacPaint, and introduced the graphical user interface (GUI) to the individual user.

Today's iMac features over 2,000,000 kilobytes of memory, and a variety of rich applications, from a Website design tool to movie editing.

Processing speed has also escalated: the 3GHz Intel Core Duo chip is about 1000 times faster than the original 8MHz Motorola chip. (Many, of course, might argue today's applications make it actually seem slower; after all, the in-flight computer used in the Apollo missions had just one kilobyte of RAM, but its software landed men on the moon.)

The future literally may be in the cloud; Google, Mr. Hertzfeld's current employer, is certainly betting on this. But to be so certain could well be taking the same chance as folks did on the mainframe in 1959.

Who's for Mac celebrating 50?

Wednesday, August 27, 2008

Biosimilars: A Debate for Everybody

For several years now, biopharmaceutical manufacturers have debated the possibility of follow-on ("generic") biologics; we'll call them biosimilars. Until 2006, legislators largely ignored it. But with rising prices and new product launches, the question of price competition has become too big to ignore.

The debate itself is important because it captures not only health care's tangled interests, but also ongoing economic shifts.

For drugmakers, biologics are no different than what SUVs were to US carmakers 20 years ago: an opportunity to supplement low margin, commoditized products (your standard bottle of pills; in our analogy, passenger cars). But how might biosimilars affect this? Indeed, might they redefine what is a generic and branded manufacturer?

The car analogy also works in how foreign manufacturers are hoping to position themselves. For example, BRIC-based companies seeing advantage in low-cost replication are pressing the WHO for guidelines.

For the supply chain, payers see biosimilars as a means toward price competition; pharmacy benefit managers see new, high margin services such as condition management, as well as new rebate opportunities, though providers would see the same for themselves; consumers see the potential for greater access and affordability.

Intertwined in the debate: IT initiatives that would enhance drug development and patient information, formulary strategies that would follow evidence-based medicine, and retail-based strategies that would alter how biologics are administered.

Most important, the debate has shifted ground from science (defining treatment) to economics (defining cost) – a language everyone can speak, and a window to transparency.

Thursday, August 21, 2008

Realignment

Rankings matter on Wall Street: they establish pecking orders, targets to shoot at. So what does it mean when Wall Street itself is no longer king of the hill?

Since the dotcom meltdown, financials (of which Wall Street is a major component) have dominated the S&P 500 index, averaging about 20% of total market capitalization. Information technology companies such as Microsoft, IBM and Google have held the number two position at 16% (a four-point differential), and health care number three at just over 13% (seven points lower).

More impressive has been the gap separating financials from the lowest-ranking sector. In 2006, this peaked at 19 percentage-points, a dollar value of more than two trillion.

On May 20th (2008), this multi-year order rebalanced, when IT surpassed financials. Now 14 points ($1.6 trillion), the gap separating the top from bottom is the lowest it’s been this decade – 11.3 points ($1.3 trillion), if you measure against financials.

What if Wall Street's stumble is more than just a share price phenomenon? What if it marks an economic realignment – perhaps a more balanced period, with no single industry dominating the others?

Is there an emergent industry that would gain from this new context? What about health care, and the possibility for efficiency gains finally taking place? And what of the other industry categories: energy, materials and consumer staples (big winners over this period); telecommunications and consumer discretionary (big losers); and, utilities and industrials (more or less even)?

Tuesday, August 19, 2008

Understanding Opinion

We can't help ourselves. That innate curiosity which focuses our attention on what the neighbors are up to can drive some of us absolutely mad.

What you think they're doing versus what they're actually doing can lead to some pretty irrational behavior: for example, in economic terms, whether trying to match their spending in some way, or selling your home.

Now consider this on a much broader scale, in which the "neighbors" aren't the folks down the street, but faces on the TV screen or biographical sketches in newspapers or in cyberspace.

How much do expectations separate from reality and shape opinion on a regional or national scale? How well do we understand this?

This is the stuff of considerable academic thought, and, in 2006, the Nobel prize in economics when it came to inflation.

The Project for Excellence in Journalism recently published a study on the uneven connection between media coverage and economic events, which it also deemed insufficient in regard to public opinion.

Their analysis raises interesting considerations: one, how significant the economy is to public opinion; two, the implication that the media industry does not totally influence opinion; and three, the accuracy with which we measure opinion.

Just maybe the general public is, in fact, quite rational, and those local "neighbor events" mere outliers. Maybe, despite all our tools, we never quite know what current opinion is; after all, by the time we get around to analyzing it, it's already shifted.

Thursday, August 14, 2008

Less Friction

UBS recently announced a new strategic direction, one that effectively ends its tenure as a universal bank. The move now holds its investment bank independently accountable – no longer able to source cheap funds from its cash generative private bank and asset management franchises.

Will other universal banks soon follow, and likewise end cross-segment subsidization? How then will investment banking operations survive on costlier risk capital?

Since UBS first announced its purchase of Paine Webber on July 12, 2000, its shares have declined 19% in US dollar terms. Shares are down nearly 60% excluding the lavish currency effect. Over the same period, the S&P 500 is 13% lower.

By comparison, the AMEX broker-dealer index, featuring purer-play banks (asset management divisions partly subsidize some), is 37% higher. The relative effect underscores just how badly management got it wrong.

For the equally unfortunate Citigroup (down 51%), the UBS move might serve as the right template: a framework for more transparency in risk-taking, which itself probably means less risk-taking.

Once it balances with return, expect risk pricing to hold these large financial players to account, and capital markets to become more efficient as a result.

This more open and competitive environment ultimately will enhance the flow of assets between issuers and investors, unleashing capital that has become far too concentrated.

The investment banks themselves will survive, but on smaller fees, though with less volatile profit margins.

Wednesday, August 6, 2008

Following the Leader

The lead steer: it evokes our innate admiration, and often our imitation (conscious or unconscious). Think of the football team captain (bear with us here) or the celebrity fashionista; in the world of investing, it's the guru or gurus always knocking the ball out of the park.

Regardless of the market, someone will always have the hot-hand, and folks will look to that strategy for answers; and if not the portfolio managers themselves, then their shareholders.

The problem, though, with the "trend being your friend" is knowing when to exit, especially when the window is narrow, and everyone might try to jump at the same time.

Once again, we're finding ourselves picking up the pieces of momentum-based investing. Once again, we're realizing that the temptation to follow the lead steer can be too great for managers to stick to their own core competencies.

Over this past year, the number of folks who claim expertise on commodities, financial engineering and emerging markets would seem to have exploded. But are they truly expert enough to be throwing hundreds of billions of dollars around?

A market is made in the fact that some folks just don’t like the popular appeal of the football captain, and never will. Sooner or later, the hot hand cools, or freezes completely.

Tomorrow’s lead steer? It’s probably someone much less glamorous than the gunslingers of recent years – a quiet, disciplined investor who measures risk-adjusted return in years, instead of quarters, months or even days.

Friday, August 1, 2008

Patient-sponsored R&D

At what point do virtual communities challenge entrenched, real world businesses? The open source software movement would argue that that question is already obsolete, and newspapers, TV broadcasters and other traditional media would certainly bear witness.

But what about industries in which social media does not appear integral to the business model?

On July 29th, the Wall Street Journal featured a company called CollabRx. Neither a software developer nor a new media vendor, CollabRx instead links patients suffering life-threatening rare diseases with a network of researchers in diverse locations. By integrating research projects across a larger study group than economics would otherwise motivate drugmakers, it dramatically accelerates (theoretically at least) the development of new therapies.

Because users (patients and caregivers) pay a fee in return for a share of any future intellectual property, the company shifts control of the development process from a stand-alone drugmaker or research institution to the consumer.

Success depends on the degree to which the community collaborates, and the incentives that make this happen.

As Bristol-Myers and Roche up the ante on Big Pharma, CollabRx presents an alternative business model – likely significant considering the impact collaboration has had on siloed manufacturers in other industries.

More important than how and when this happens is the fact that tools now exist which place the consumer at the economic center of the R&D process.

Let's see whether "Old Pharma" ignores or integrates this dynamic.