Tag: E&P Multiples

The Bell Curve of Daily Stock Market Movements, E&P Multiples, and Large Pharmaceutical Charities

WSJ – Daily Shot: Chartr – US Stock Market Daily Movements (Last 10yrs) 8/13/19

Bloomberg – Energy’s Dumb Money May Be Wising Up – Liam Denning 8/13/19

Traditionally, these swung low when oil prices were very high, in anticipation of an inevitable cyclical downswing, and rose when prices fell, pricing in the next recovery. In this latest cycle, however, that relationship has changed. When oil prices fell sharply in 2015 and 2016, valuation multiples soared (and equity issuance spiked). But when oil dropped in late 2018 and this summer, multiples fell alongside it.

The higher risks around energy earnings and damaged trust means investors demand more to buy into them – meaning a higher cost of capital expressed in lower valuations.

Economist – Why America’s biggest charities are owned by pharmaceutical companies 8/13/19

When patients in need of medicines in America go to fill their prescription the price they have to pay can vary wildly. For generic off-patent drugs prices are usually low for the uninsured and free for those with insurance. But for newer patent-protected therapies prices can be as high as several thousand dollars per month. Those without insurance might end up facing these lofty list prices. Even those with coverage will often have to fork out some of the cost, called a co-payment, while their insurance covers the rest.

These co-payments, which for the most expensive drugs can themselves be prohibitively high, can act as a deterrent to filling a prescription. Into this gap a new type of charity has emerged: one that offers to pay co-payments for patients. There are two main types of such charities. There are independent ones, like the Bill and Melinda Gates foundation, America’s largest charity, which spent $3.4bn on co-payments in 2014.

There are also co-pay charities owned by drug makers themselves. According to public tax filings for 2016, the last year for which data are available, total spending across 13 of the largest pharmaceutical companies operating in America was $7.4bn. The co-pay charity run by AbbVie, a drug maker that manufactures humira, a widely taken immunosuppressant, is the third largest charity in America. Its competitors are not far behind. Bristol-Myers Squibb, which makes cancer drugs, runs the fourth largest. Johnson and Johnson, an American health conglomerate, runs the fifth largest. Half of America’s top 20 largest charities are co-pay charities owned by pharmaceutical companies.

The impact of these charities is large and growing. Most of them are less than 20 years old. In 2001 just five drug makers operated co-pay charities, spending a total of $370m. That had risen 20-fold to $7.4bn by 2016. According to Ronny Gal, an analyst at Bernstein, a research firm, the co-payment on the price of a drug is usually just 10% of the cost the pharmaceutical company ultimately charges to the insurance provider. This would mean that $7.4bn spent on copayments could earn drug makers $74bn in revenues, which would account for nearly a quarter of total drug spending in America. Add in spending by the Gates Foundation and this share rises to a third.

Pharmaceutical companies will often claim that helping patients with their co-payments is one way of making expensive drugs more accessible. But it has the fortunate consequence of making their customers price insensitive, because insurance companies will often use high co-payments to nudge their customers into opting for generics over costlier branded drugs: no co-pay, no incentive to save money.

Using co-pay charities to support high prices is good for business, but charitable contributions foster healthy profits in another way too: they are tax deductible. The corporate tax codes of most countries allow companies to deduct the cost of any charitable giving from pre-tax profits. But in America the system is more generous, says Jason Factor, a tax lawyer at Cleary Gottlieb Steen and Hamilton. Companies that give products for the benefit of the “needy or ill” can deduct up to twice the cost of gifted goods.