Wednesday, April 30, 2008

Food: Sandwiches in NYC

http://www.nytimes.com/2008/04/30/dining/30sand.html

I need to go on a crawl when I get back.

Though, for the record, I don't think the following rule is fair:

"The ground rules: A sandwich had to be composed as such; mere food on bread did not count. (This left out, for example, pan de lomo saltado, a popular Peruvian stir-fry of beef, onions and peppers laced with soy sauce, typically served with French fries, but piled onto a crusty roll for sandwich purposes.)"

Tuesday, April 29, 2008

Finance: What went wrong

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Muzzling the Watchdog
By WILLIAM DONALDSON, ARTHUR LEVITT Jr. and DAVID RUDER

THE downfall of Bear Stearns, the release of Treasury Secretary Henry Paulson’s sweeping blueprint for the overhaul of our financial regulatory structure, and the worsening health of the stock market and our economy has raised serious questions for the future of the Securities and Exchange Commission. As the capital-markets regulator and investor’s advocate, the S.E.C. is a natural recipient of finger-pointing during a market crisis.

Each of us led the S.E.C. during challenging times — the stock market crash of 1987, the price-fixing scandal at Nasdaq in the 1990s, and the accounting and governance failures and mutual fund scandals of this decade. We are in agreement with Secretary Paulson that the world of finance is changing rapidly, having eclipsed in many areas the regulatory structure put in place, piece by piece, over the past century. Yet we fear that the current conversation about the future of the S.E.C. is getting ahead of itself. Secretary Paulson’s proposals to change the structure and function of the S.E.C., if adopted, risk inflicting serious damage to investors and our capital markets.

The current housing and credit troubles do not present a sufficient basis for reforming the entire financial regulatory system. Instead of moving hastily, policymakers need to examine what went wrong, why it went wrong and what the best approaches are for re-establishing the unequaled reputation and performance of the American capital markets.

There is precedent for such an exercise. In 1987, a presidential task force was established to investigate the Black Monday crash. Today, we need a similar exhaustive, bipartisan and impartial examination to explore a series of possible business and regulatory failures.

This investigation should include apparent conflicts of interest on the part of the credit ratings agencies; the failure of banks and other lenders to adopt sound lending practices; the failure of investment banks to disclose that they had significant portfolios of securities backed by subprime mortgages; the sale of high-risk securities to investors for whom they were unsuited; the breakdown (or absence) of adequate risk management systems among the top financial services firms; and the failure of regulators to recognize and take early action to deal with the problems that have grown to today’s magnitude.

Any reforms undertaken after the commission completes its study should not undermine the S.E.C.’s central roles as an investor’s advocate and a law enforcement agency. But the Treasury Department proposal envisions an S.E.C. that would no longer regulate through hard-and-fast rules enforced swiftly and justly, but rather would practice “prudential” regulation, offering up principles and conceptual guidelines and working collaboratively behind closed doors with regulated entities and their self-regulatory organizations when they have violated the law.

This approach would turn the S.E.C. from a market referee into an industry coach — a regulator that is heavy on forgiveness and light on punishment. That’s not a viable way to address wrongdoing. In our experience, tough enforcement of the securities laws deters bad behavior by market participants.

The problem with the S.E.C. today is that it lacks the money, manpower and tools it needs to do its job. The commission’s 2009 enforcement budget does not keep pace with inflation, although it does provide significant increases in the risk-assessment function.

The S.E.C.’s effectiveness is not contingent just on the size of its budget. Historically, the S.E.C. has been effective in using the bully pulpit to affect the behavior of market actors. But before we merge the S.E.C. with other regulatory agencies or change its regulatory mission, we should empower it to do its current job by providing it with what it needs to be a more effective regulator.

We are not advocating a preservation of the status quo. The only thing constant in our global economy is change, and to keep pace with the capital markets and needs of investors, our regulators too must change. But before we embark on a radical restructuring of the financial regulatory system, we must understand clearly where the current problems lie, what was and was not done by regulators leading up to the current crisis, and whether new powers are needed to keep pace with financial innovation.

And above all, whatever we do, we must preserve the S.E.C.’s role as the enforcer of the markets’ rules of the road and as the government’s advocate for investors of all sizes.

William Donaldson was the chairman of the Securities and Exchange Commission from 2003 to 2005, Arthur Levitt Jr. from 1993 to 2001 and David Ruder from 1987 to 1989.
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Biotech: Genetech and Biogen fail in phase II & III

Just thought this was a fairly interesting look at failures in Biotech land.

My understanding of the Biotech industry is that they're generally concerned with all possible applications of combinations of biology and technology. Some firms create products very similar in nature to what pharmaceuticals produce in terms of use/purpose, while others might be more concerned with genetically modified organisms for agricultural purposes. In the case of companies making products to cure human ailments, instead of general compounds or substances, the product appears to generally be far more complex (such as antibodies in the case of Genetech's Lupus product).

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Biotech Drug Fails Crucial Lupus Study
By REUTERS

Two biotechnology companies, Genentech and Biogen Idec, said on Tuesday that a crucial study of Rituxan did not meet its main goal of a response in patients with systemic lupus erythematosus, commonly called lupus.

The Phase II/III study also did not meet any of the six secondary endpoints, the companies said.

Shares of Genentech fell more than 6 percent Tuesday, while Biogen stock fell more than 4 percent.

“We are disappointed in the results of this Phase II/III study, but we understood from the outset the significant challenges in developing treatments for systemic lupus erythematosus,” Dr. Hal Barron, Genentech chief medical officer, said in a statement.

Lupus is an autoimmune disease characterized by inflammation of the joints, skin, major organs and central nervous system as the immune system attacks healthy tissues and cells.

The 257 patients in the study were evaluated for effectiveness every four weeks for 52 weeks using a measure of lupus disease activity known as the British Isles Lupus Assessment Group.

An analyst at JP Morgan, Geoffrey Meacham, said Wall Street had been optimistic about Rituxan for lupus because of favorable data in smaller studies.

“That said, our model and most Street models did not include lupus sales, so we don’t expect large downward revisions to estimates on the news,” Mr. Meacham said in a note.

Rituxan, an antibody that is approved to treat rheumatoid arthritis and non-Hodgkin’s lymphoma, is also being studied in a Phase III trial in a different set of patients who have lupus nephritis. Results of that trial are expected in the first quarter of 2009.

The results are a blow to Genentech, which was riding high after another drug, Avastin, was approved for breast cancer in February. Now Rituxan has failed twice for new uses — multiple sclerosis and lupus — dealing a blow to expand uses of the drug.
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Monday, April 28, 2008

General: Similarities between Credit Cards and Pharmaceuticals

Just an observation, but I recently noticed a similarity between the credit card and the pharma industry.

With a credit card, a large percentage of the revenue for the card issuer comes from "interchange" fees that are charged as a percentage of all money used for purchases to the merchant that accepts the card. Most consumers aren't even aware that the fee exists as it has no direct impact on them (though one would think given the percentage of purchases that are made using CCs that interchange fees are now baked into merchants' prices). Generally, the interchange rate is used to finance the award programs of the credit cards. As a result the cards with the best awards programs are also usually the cards with the highest interchange fee rate. The situation gives merchants and consumers interests that are directly opposed to each other: consumers want to use cards with the highest interchange rates (though not directly so) and merchants want consumers to use cards with the lowest possible interchange rates. Due to contracts put in place by the credit card companies, generally merchants aren't able to pass interchange costs on to consumers or to even influence their behavior by making one card more attractive (financially) to use than another. As a result, consumers use the cards with the best programs they can get their hands.

Similarly, in the recent past consumers of pharmaceuticals have traditionally also been isolated from the price of the products that they purchased -- assuming they have insurance. As such, insured consumers didn't need to worry about the price of the drugs they were purchasing and thus selected drugs solely upon greatest perceived benefit (e.g. purchasing expensive brand name drugs over generics). Things have changed though as health-care providers have started imposing a tiered structure that charges consumers co-pays based upon a tiering structure so as to shape consumer behavior. A USAToday quote illustrates: "The average co-payment now in private insurance is $10 for generics, $22 for brand-name drugs on an insurer's formulary and $35 for those not on the formulary, according to the Kaiser survey. The average co-payment for a fourth-tier drug is $74."

But, there are definitely parallels between the purchasing structures that have been created or developed in these two industries. That is, the following are both similar:

Pharma -> health care insurer -> consumer
&
Payment company (CC) -> merchant -> consumer.

The big difference being that health care providers have successfully developed a way of passing costs on to consumers, whereas strong contracts have made it impossible for merchants to pass on their up-stream Credit Card costs to consumers. The end result is that consumers of drugs are becoming far more price conscious and are favoring cheaper generics over branded drugs - resulting in a state where more than 40% of prescribed drugs are now generic. Whereas, American Express and elite Master Card and Visa products reign supreme for mid to high end product/service purchasing with consumers.

The following from an USA today Article sums things up nicely:
While most working-age adults have insurance with two or three different "tiers" corresponding to how much they pay at the pharmacy for certain drugs — with generics the cheapest and brand-name drugs more — about 40% of the Medicare plans have four tiers, according to the analysis by Avalere Health, a for-profit research firm in Washington that did an analysis of the drugs earmarked for higher payments by patients. Fourteen percent have five tiers.

In comparison, 4% of workers with health insurance through their jobs have a fourth tier, according to a nationwide survey by the non-profit Kaiser Family Foundation.

In that fourth tier — where Medicare patients will most commonly pay 25% to 33% of the cost of the drug rather than a flat dollar amount — are such expensive treatments as Remicade and Enbrel for rheumatoid arthritis, Procrit and Aranesp for anemia and Copaxone and Betaseron for multiple sclerosis.

That differs, says Avalere President Daniel Mendelson and other benefit experts, from the drugs most commonly found in higher "tiers" in employer-offered plans. Often, those tiers are used by employers generally trying to get workers to think twice about taking expensive drugs for non-life-threatening conditions, such as hair loss, allergies or impotence.

General: Patents & Compulsory Licensing

From an S&P Industry Analysis on Biotechnology...

just general coverage of the different types of patents. Could be useful for any case involving a patented product.
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Among the different types of patents, a �composition of matter� patent, which describes the product�s chemical or biological nature, generally provides the company with the best protection. A �use� patent lets the holder manufacture and market the compound for a specific therapeutic purpose, preventing competitors from using the drug in the same way. A �process� patent describes the manufacturing process of a product.

The US Patent and Trademark Office issued its first patent for a genetically altered animal in 1988 amid considerable controversy. More recently, debate has erupted about patents on genetically engineered human cell lines and synthetic constructs incorporating human genes. A recent US Supreme Court decision regarding patents is of great importance to the biotechnology industry. In April 2007, the court adopted what appears to be a tougher standard for patenting new products. The case at hand involved an auto parts manufacturer, but it is broadly applicable to the bio-tech and pharmaceutical industries. In brief, it stated that predictable advances � based on modest innovations that would have likely occurred in the normal course of progress, or are combinations of existing technologies � are so obvious that they are ineligible for patents. Biotechnology companies and trade groups are expressing concern, even as they wait to see how implications of the decision play out in lower courts.

...

WTO regulations contain an exception known as compulsory licensing, which allows a country to break patents in a national emergency and make copies of an important drug, either on its own or by licensing rights to do so to private generics companies. Governments that use compulsory licensing are concerned that their huge, poor populations do not have the money to pay for life-saving, brand-name medications.

Compulsory licensing has become an area of controversy, as some developing countries get increasingly aggressive about fighting Western drug companies over high-priced brand-name drugs. In response, some biotechnology companies have set up programs to make some of their drugs (mostly for infectious diseases) more accessible to poor people in developing countries. For example, in September 2006, Gilead Sciences Inc. licensed nonexclusive rights for its HIV/AIDS treatment Viread to eight Indian generics companies, which will sell the drug in 95 very poor countries (but not in the US) at extremely low prices. In December 2007, under the President�s emergency plan for AIDS relief, the FDA granted approval to Matrix Laboratories Ltd. (a subsidiary of Mylan Inc.) to sell generic Viread outside the US.
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General: New Adventures in Ice Cream Segmentation

I went to buy ice cream and noticed that Haagen Dazs has a new sub-brand that they're pushing: Haagen Dazs Reserve. Haagen Dazs Reserve (HDR) is a dollar or two more expensive than regular Haagen Dazs and seems to have a slightly higher fat content. I imagine the product is meant to compete in the increasingly crowded premium ice-cream market (even Vosges now has an ice-cream product) -- Though, HDR is still a bit cheaper than other really high end products (I've seen Voseges for $6.99 and HDR for $4.99 - regular HD normally goes for around $2.99 to $3.50).

You can kind of get a sense of what HD is going for with HDR by comparing product web pages for HD chocolate and HDR Amazon Valley.

The former gives a two sentence description of the flavor and a link to the ingredients and nutritional facts. The later talks of the flavor notes, inspiration, food pairing possibilities, and wine pairing possibilities. The Amazon Chocalate would go perfectly, for instance, with "Dessert reds, including late harvest Zinfandels or Banyuls from France." Thats a bit much, no? But its probably the cheapest ice cream product with "hints of chili" on the market.

Pharma: Low Market Pentration Rates Due to Structural Issues

This article gives some examples of why a drug, even if highly effetive, might not achieve market saturation. In the case of radioimmunotherapies, which can cost upwards of 50,000 a year for treatments, sometimes penetration rates only go as high as 10%. Here are some thoughts as to why from the article:

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Under federal rules, hospitals that do not offer a drug to Medicare patients are barred from offering it to other patients, even if their insurers fully cover the cost of treatment. Because Bexxar and Zevalin contain radioactive material, the drugs must be administered by specially licensed technicians and doctors. They are usually given in hospitals.
...
The drugs can require private cancer doctors to transfer their patients to hospitals, and the private doctors may view the hospitals as competitors. As a result, fewer than 10 percent of patients who are candidates for the drugs get them.
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Pharma: Pricing for Results and Effectiveness:

Interesting new pricing model for drugs are mentioned in this article.

The general idea being that some really expensive drugs are only being charged for if they deliver the desired result.
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Another regulatory boost may come from cost-benefit analysis that considers the long-term benefits, and not just the high price tags, of innovative new drugs. Britain's National Institute for Health and Clinical Excellence (NICE) has approved Herceptin, a targeted cancer drug, despite an annual cost per patient of nearly $50,000 because, in the words of Sir Michael Rawlins, NICE's chairman, “it provides long-term value”. NICE has also agreed to buy a cancer treatment made by Johnson & Johnson that has little effect on a third of patients, on the condition that it pay only when the drug works. And with an expensive Alzheimer's drug, the agency ruled that it would not pay for patients with the mildest form of dementia to take it—a ruling that was challenged in a London court this week.
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Saturday, April 26, 2008

Pharma: Blocking New Entrants After Patent Expiration

This is from an excellent economist article about how some big pharma companies are blocking new entrants:

Basically, it comes down to two approaches:
1) Settling with the generic company in such a way that they don't bring their product to market right away.
2) Releasing your own generics so that you can capture the 6 month monopoly period and thus distort the economics behind other generics entering.

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The best way out for the established drugs industry would be to find lots of clever new blockbusters to replace the ones going off-patent. But as the industry's sagging share valuations suggest, the new-drugs pipelines at big firms have run dry. So their managers are relying on two controversial new strategies. First, they are settling the lawsuits brought by generics firms, sometimes paying them to delay launching cheap pills. Novartis, a big Swiss firm, recently made a private settlement for Dr Reddy's to drop a lawsuit in return for the Indian firm delaying the launch of a generic rival to Exelon, its Alzheimer's remedy. This month it emerged that GlaxoSmithKline (GSK), a big British pharmaceutical firm, has also settled a patent lawsuit with Ranbaxy concerning the generics firm's launch of a cheap version of Imitrex, GSK's migraine reliever.

Under American laws designed to encourage generic drugs, which save money for patients, the first generic maker to win regulatory approval for its version of any given branded drug is supposed to enjoy a six-month monopoly. This promised pot of gold was designed to support small generics firms—but Big Pharma has found a loophole. It is pre-emptively launching generic versions of its own branded pills, which wipes out those six months of monopoly profits and undermines the economics of generics firms.
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The Footwear and Outdoor Apparel Industry (An Analysis)

(I wrote this for a paper. I was a bit rushed in writing it - so the language and organization might not be best - but the information should give a feel for the structure of the entire apparel industry even though the paper is focused on footwear.)

The footwear industry is a large and growing industry: the estimated value of the United State’s share of the market was $54.1 billion in 2005 with 2.2 billion pairs of footwear sold and with sales volumes growing at a compound annual growth rate of 4.5% from 2001 to 2005. The United States is the world’s largest footwear market in terms of value, but it only makes up 33.9% of the global market in terms of revenues – indicating that there are plenty of opportunities for American footwear companies to expand internationally .

The footwear industry is composed of three major participants: designers, manufacturers, and retailers. The footwear industry, much like the rest of the apparel industry, has consolidated considerably in recent decades leading to each of the aforementioned categories of participants having strong dominant players. But, there are still many different international, national, and regional players actively competing in each of the roles.

The footwear designers primarily design, develop, and market footwear products and other brand-related apparel. The design companies vary largely both in their market share and in the number of brands they manage. Nike for instance, which has a 34% share of the sneaker market, relies primarily on its eponymous brand even though it competes in many different sports related market segments. Companies like Wolverine Worldwide and Deckers Outdoors, on the other hand, manage diversified portfolios of far more focused brands. There are also a number of small, recent entrants such as Crocs and Heely’s that have only a very narrow range of highly focused niche products that sell under a single brand. Despite the differences in size and number and types of brands managed, most of the footwear designers are similar in their limited amount of vertical integration into retail and manufacturing.

Retailing and Buyer Positional Power


Most footwear is sold to customers through retail channels that vary depending upon the market segment the product is aimed at. Though the retailers are still pretty fragmented, most footwear brands rely heavily on a small number of companies for purchasing the bulk of their merchandise. For instance, Foot Locker, the largest retailer of athletic sports sneakers, is Nike’s largest customer and accounts for 10% of Nike’s sales on average . The Finish Line, a mall based seller of sneakers is a close second with an almost equally large share of Nike’s sales. Outdoor hiking shoes and sandals are predominantly sold through a small number of outdoor outfitters such as EMS, REI, and L.L. Bean. Non-athletic products such as Uggs and Cole Haan are primarily sold through a small number of high-end department stores such as Nordstrom’s, Macy’s, and Dillard’s – with Nordstrom’s accounting for 11% of all Ugg’s sales .

The power of the retailers in the footwear industry varies based upon the segment of the market that the retailer serves. Generally though, the power of and risk associated with the retailers over the design firms is in proportion to the percentage of sales that they are responsible for. Companies like Foot Locker have been able to strongly increase Nike sales over those of its rival Reebok in the past through the amount and quality of retail space that they provide for each of the company’s products . A major benefit of the Addidas-Reebok merger, according to some analysts, is that it provided a lot more “leverage in dealing with powerful retail chains like Foot Locker.” According to the same industry analyst Reebok and Addidas were, “confronting a retail community with two huge companies, with 60% of the market.” The future further concentration of footwear retailers has the possibility of not only decreasing the margins of the footwear designers, but it also has the potential of increasing the credit risk of footwear designers which generally sell large volumes of their products to retailers on credit. Larger retailers, as they continue to consolidate, also have the potential of forward integrating into shoe design and marketing functions as evinced by the financial success of PayLess ShoeSources’ $35 Amp Runner and Steve and Barry’s $15 Starbury basketball shoe .

Possibly to reduce the power of, and risk associated with, their retailers, medium to large footwear design companies have been increasingly forward integrating by creating their own retail channels both domestically and internationally. In the United States, Nike has been expanding the number of NikeTown and factory stores that it directly operates. Decker’s Outdoors, a much smaller player, has recently opened up 3 direct retail outlets in California and an Uggs concept store in NYC. Both Nike and Addidas have been exclusively using dedicated branded stores as part of their strategy for expanding into the Chinese market to increase the amount of control they have over the experience surrounding the sales of their products . Additionally, almost all footwear designers regardless of their size have been conducting direct sales through the internet, though sales through the internet have yet to grow to a point where they rival tradition brick and mortar channels.

Suppliers and Manufacturers’ Positional Power


Footwear-manufacturing is very labor intensive and capital-light, which has led to much of the work moving from the United States and Europe where labor prices are high to low-cost labor centers like Thailand, Vietnam, Indonesia, and China in the past two decades. Though many of the long-established footwear designers used to engage in the manufacturing of their products, most converted to being strictly design and marketing firms in the 1980s to lower costs. The few footwear companies, such as Timberland, that own factories only in-source very small percentages of the volume of merchandize that they sell. Most footwear design companies rely upon independent, low-cost overseas contract factories for production. The design firms primarily provide design specifications, manufacturing instructions, and quality requirements to contract factories and then purchase finished products from the contract factories for resale to distributors and retailers. The footwear manufacturers are incredibly fragmented and competitive; most medium to large design firms source their products from multiple small production companies spread over multiple countries to reduce business risk, and most designers do not have long-term contracts or relationships with any of their manufacturers. Given that most footwear designers outsource their manufacturing overseas, the risks associated with doing so, including the threats of political instability, tariff-law changes, and currency exchange rate fluctuations, impact all of the designers. However, the risk associated with outsourced, overseas manufacturing is more easily mitigated by larger footwear companies that have enough scale to spread their manufacturing contracts over more countries and companies and have the resources to engage in financial hedging activities using instruments like currency derivatives. Many companies, such as Timberland, that don’t have a large amount of geographic diversity in their supply chain recently suffered severely when the EU decided to implement duties on leather footwear produced in China and Vietnam.

Due to the structure of the industry, the manufacturers of footwear do not currently have a lot of pricing power because of the lack of concentration in the sector. The largest of the footwear manufacturers is Pou Chen, a Taiwanese diversified industrial company that manufactures shoes throughout Asia using its Yue Yuen subsidiary. Yue Yuen produces upwards of 7% of Nike’s Shoes and large quantities of shoes for Reebok, Puma, Timberland, Addidas, Wolverine Worldwide, Dr. Martin, Asics, and New Balance. Some recent estimates indicate that Pou Chen was producing 190 million pairs of shoes a year as of 2006 . Despite Pou Chen’s size, there doesn’t appear to be evidence that it has any extra pricing power over other manufacturers given how many competitors it has. Pou Chen, like many other manufacturers, doesn’t have more than a 7% share of the volumes for any one company; as such its influence is spread over a very large number of design companies. Nike, for instance, is able to insulate itself from its manufacturers by working with over 60 independent contract manufacturers to maintain vendor and geographical diversity in its supply chain and Nike sources no more than 35% of its product from any single country .

Possible future threats to the footwear designers might emerge in the future if the contract factories consolidate further; forward integrate by developing designing and marketing skills of their own; or further develop their own distribution networks. The credibility of the threat of contract manufacturers moving vertically up the value chain was recently illustrated when one of New Balances contractors decided to design its own shoe and sell it first using New Balance’s brand and then using its own brand -- Henkee. The Henkee shoe, a low cost fashion sneaker, was a huge success in China in the late 1990s Another Chinese shoe manufacturer recently started selling shoes with the exact same design as New Balance’s shoes under their newly created New Barlun brand; New Barlun directly copied New Balance’s American targeted marketing material for its Chinese audience . Though, the threat of brands owned by manufacturers competing directly against American brands seems unlikely in the American market, the risk is definitely very real in the international markets – which are critical for many American companies’ growth strategies.

On the distribution side, Pou Chen, one of the world’s largest manufacturers has been actively buying up smaller factories as part of its growth efforts and it has been developing retail outlets throughout China. Pou Chen currently operates 600 stores in China and is planning on increasing that number to 1000. Pou Chen also has exclusive distribution rights for Asics, Hush Puppy, Converse, and Coleman in China. Its possible that as Pou Chen continues to grow both its manufacturing business and its distribution business that it will be able to use its size during pricing negotiations with the footwear designers or use its retail presence to sell its own brands.

Entry Threat and Internal Rivalries


Given that footwear design companies primarily engage in the design, marketing, and distribution of footwear, the entry barriers to the industry are limited to those areas. Entrant companies and brands have generally first emerged in market segments that the larger companies were either not competing in or were otherwise weak. For instance, recent entrants into footwear design, such as Payless ShoeSource and Dave and Barry’s have taken advantage of the relatively small number of powerful players in the budget segments of the market – which has been growing at 9% for the past 2 years.

Given the relatively low costs of entry into the footwear industry, the most successful strategy for ensuring business stability and growth for most footwear designers has been maintaining a broad product mix that appeals to multiple consumer segments, diversifying sales across as many markets as possible, and engaging in rapid product innovation. Diversification in terms of products and geography provides the best guarantee that the products of new entrants and existing rivals will not have an immediate and major impact on sales. Diversification also guarantees that if consumer sentiment shifts away from one product category due to climate or fashion changes that there are other products to carry the business. Product innovation, on the other hand, is critical because it helps to create entry barriers in specific consumer segments – though generally it matters far less for the non-performance and budget segments of the market. Universally, the ability of companies to rapidly and constantly introduce new styles is critical towards adapting to consumer demands and warding off copy-cat products from new entrants and incumbents.

Generics and drug brand names

An article about branding generic drugs...

a whole bunch of intersting pharam strategies in this article. To quote a bunch of passages:

Leveraging the sixth months of marketing exclusivity that the FDA provides to first to market generics
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With too many players in too many parts of the business, companies that primarily sell generics often find themselves lost in the crowd, able to stand out on pharmacy shelves only by cutting prices. More and more, though, they are replacing the identically drab scientific labels on their products with brand names of their own, raising prices in step with a higher profile.

''Everybody tries to undercut each other on price -- it all becomes a high wire act,'' said Allen Chao, the chief executive of Watson Pharmaceuticals, a generic drug maker based in Corona, Calif., adding, ''We decided the only way to deliver consistent earnings, quarter after quarter, was to go into the branded drug business.''

There have always been some brand names in the generic drug cabinet. When a drug loses its patent protection, one company gets the right to sell a generic version for about six months, after which others are allowed in. Some companies immediately put a brand name on that first version and back it with marketing to doctors and consumers.
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Locking up suppliers to reduce competition and enable price increases...
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And a few companies, like Mylan, have entered into exclusive agreements with the suppliers of chemicals and other raw materials for their drugs, arrangements that can have the effect of reducing the number of generics competitors.

In the case of lorazepam, an anti-anxiety drug, Mylan was able to reduce its top competitors largely to just Ativan, the original patented version by American Home Products. In February, after it had the field more to itself, Mylan raised the wholesale price of its version of lorazepam by 343 percent, to $796.67 for 1,000 pills, from $179.95. The company attributed the jump to regulatory delays and legal fees from patent disputes, not to its arrangement with a supplier. A spokeswoman added that Mylan's competitors could have gone to other suppliers.
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Erecting legal barriers to entry...
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Drug patents now last for 20 years. Yet by the time a company actually gets a drug to market, its patent has already largely expired, leaving it just eight years on average to be the lone seller. At the end of the patent period, companies often sue to protect their exclusivity by raising questions about the ability of generics makers to produce a safe substitute. Such a challenge can cost a generics maker millions of dollars in legal fees and lost revenues.
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Wholesalers shaping their suppliers...
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Other market factors have lately made matters worse. The nation's drug wholesalers have long complained that the generics industry -- valued at $7.9 billion in the United States last year, or 8.4 percent of total drug sales -- has too many players, creating inefficiencies and extra costs. In 1996, several of the wholesalers -- including the industry leaders Cardinal Health Inc. of Dublin, Ohio, and the McKesson Corporation of San Francisco -- reduced the number of their so-called preferred suppliers, forcing many of the small manufacturers out of business. The carnage prompted many chief executives to quickly add some ballast to their bottom lines.
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The power of branded generics
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Yet laying claim to a branded drug is neither easy nor inexpensive.

To roll out a new patented formula can cost $450 million to $600 million in research and development. (Teva is spending less because of a sharing arrangement with some Israeli universities and hospitals.)

To develop a branded generic, a company has to choose a drug that is technically difficult to reproduce, which will tend to narrow the number of possible competitors.

It also has to be prepared to back its new named version with a marketing campaign directed at doctors, who can specify a branded generic when writing a prescription. Anything with a name -- which brings with it the implication of higher quality than something without one -- can command a higher price.

Enough money is at stake to spark a controversy, as it has over Mylan's exclusive arrangement with one supplier. The Pittsburgh-based Mylan struck that deal shortly after the final quarter of 1997, when 41 of its 97 generic drugs lost money.

The agreement with the supplier, which involved raw materials for several other generics besides lorazepam, gave Mylan ''the majority of the market until competitors could catch up,'' said Ian Sanderson of Cowen & Company. ''The company can triple sales from that drug,'' he added, referring to lorazepam.

But the price increase -- as well as similar increases by other generics makers, including Geneva Pharmaceuticals U.S.A., a division of Novartis -- was greeted by a nationwide chorus of criticism from independent pharmacists. It takes several weeks for insurers to alter their reimbursement schedules following price increases, the pharmacists complained, forcing them to absorb the difference in some cases.
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And, an interesting fact from 1998...
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For one thing, knockoffs are becoming more popular. Generic drugs now account for 42.1 percent of all dispensed prescriptions, up from 32.4 percent six years ago, according to I.M.S. Health, an industry consultant. For another, their ranks are going to swell in the next decade as branded drugs that now generate some $41 billion a year in revenues come off patent. These drugs include such superstars as Eli Lilly & Company's Prozac.
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Friday, April 25, 2008

Vampire Peacocks

Ok - in theory this is supposed to be a blog on business - specifically carrying information and articles that I think are insightful and helpful for people (i.e. me) preparing for case interviews. As such, a link to an article on vampire peacocks really has no place in this blog. I'll admit that, though I'm still going to post it.

If you do a google search you'll find tons of other articles on this story. Including this one regarding a memorial built for the peacock, and this one from the associated press via foxnews.com.

Cross-selling t-shirts on CNN.com?

I just noticed a little t-shirt shaped symbol link next to some of the cnn.com headlines. Clicking on it reveals that you can now buy t-shirts with a CNN headline printed on them for 15 dollars. The new product is only in beta, but for some reason I can't imagine it represents the answer to the question of how news websites like NYTimes.com and cnn.com can increase their revenue. But - I guess we'll see...

Wednesday, April 16, 2008

Retailers in distress

This article on the current troubles with the retail industry is fascinating, if not just for its quick synopsis of Bombay's rather flawed expansion strategy. It would be interesting to get more details on their plan and where it came from. I would love to know if it was an internally produced strategy, if they jumped right into the plan or piloted it first, whether or not focus groups composed of the target demographic were consulted, etc...

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In most cases, the collapses stemmed from a combination of factors: flawed business strategies, a souring economy and banks’ unwillingness to issue cheap loans.

Bombay, a chain with 360 stores, was considered a success in the furniture world, after its sales surged from $393 million in 1999 to $596 million in 2003.

Then the chain decided to move most of its stores out of enclosed malls into open-air shopping centers. It started a children’s furniture business, called BombayKids. And it started carrying bigger items, like beds and upholstered couches, with higher prices than its regular furniture.

Consumers balked at the changes, hurting Bombay’s sales and profits at the same time that its expenses for the ambitious new strategies began to grow. The timing was unenviable: By early 2007, the housing market began to falter, so purchases of furniture slowed to a trickle.

The company was running out of money, but banks refused to lend more. “They did not want to take the chance that we might not repay the loans,” Elaine D. Crowley, the chief financial officer, said in an interview.

In September 2007, Bombay filed for bankruptcy protection. The highest bid for the company came from liquidation firms, who quickly dismembered the 33-year-old chain. Bombay, which once employed 3,608, now has 20 employees left. “It is very difficult and sad,” Ms. Crowley said.

The bankruptcies are putting a spotlight on a little-discussed facet of retailing: heavy debt.
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Subsciption models in the medical device industry

Generally I associate subscription pricing models with services, software, or periodicals. Occasionally, you see hardware associated with a subscription service if the hardware is needed to consume the service - such as with cable or satellite TV. Its fascinating to see it being used with a medical device such as a hearing aid. According to a NYTimes article though The Lyric, a new hearing aid, does just that. I'm guessing the subscription model was used to over come the fact that the device needs to be completely replaced every 1-3 months (a rather uncertain and short time period) when its batteries run out. It could also be a clever way of engaging in price discrimination. Also - people are used to paying large sums of money in the health care industry for a service, but possibly less so for consume electronics. By treating the hear aid as a service the company might also be successfully extracting more money than they would otherwise be able just because of expectations surrounding the category of the product.

quick update: Just found this article on the economics of hearing aides. I have no idea idea how good the source is though.

Monday, April 14, 2008

Long tails in publishing

Just read this fascinating NYTimes article about Philip Parker - An Insead Business School professor who has written over 200,000 books. Most of the books, if not all, were assembled algorithmically and generally his works are only printed on demand. Interesting business model. Unfortunately its unclear as to how much money he actually makes.

I couldn't help but look for one of his works on Amazon, where a search for his name immediately brings up one of his master pieces: "The 2007 Import and Export Market for Household Refrigerators in Czech Republic." Which only sells for $104!

The product description is hysterical:

"On the demand side, exporters and strategic planners focusing on household refrigerators in Czech Republic face a number of questions. Which countries are supplying household refrigerators to Czech Republic? How important is Czech Republic compared to others in terms of the entire global and regional market? How much do the imports of household refrigerators vary from one country of origin to another in Czech Republic? On the supply side, Czech Republic also exports household refrigerators. Which countries receive the most exports from Czech Republic? How are these exports concentrated across buyers? What is the value of these exports and which countries are the largest buyers? This report was created for strategic planners, international marketing executives and import/export managers who are concerned with the market for household refrigerators in Czech Republic. With the globalization of this market, managers can no longer be contented with a local view. Nor can managers be contented with out-of-date statistics which appear several years after the fact. I have developed a methodology, based on macroeconomic and trade models, to estimate the market for household refrigerators for those countries serving Czech Republic via exports, or supplying from Czech Republic via imports. It does so for the current year based on a variety of key historical indicators and econometric models. In what follows, Chapter 2 begins by summarizing where Czech Republic fits into the world market for imported and exported household refrigerators. The total level of imports and exports on a worldwide basis, and those for Czech Republic in particular, is estimated using a model which aggregates across over 150 key country markets and projects these to the current year. From there, each country represents a percent of the world market. This market is served from a number of competitive countries of origin. Based on both demand- and supply-side dynamics, market shares by country of origin are then calculated across each country market destination. These shares lead to a volume of import and export values for each country and are aggregated to regional and world totals. In doing so, we are able to obtain maximum likelihood estimates of both the value of each market and the share that Czech Republic is likely to receive this year. From these figures, rankings are calculated to allow managers to prioritize Czech Republic compared to other major country markets. In this way, all the figures provided in this report are forecasts that can be combined with internal information sources for strategic planning purposes."

And, of course, I just added The 2007 Import and Export Market for Household Refrigerators in Czech Republic to my Amazon wish list.

pharma: Increasing drug prices & the healthcare industry's influence over scientists

Looks like insurance companies are combating higher drug prices by decreasing coverage of tier 4 and tier 5 drugs (i.e. expensive "specialty drugs"). The details.

This article is also interesting...

As a brief little update to this post, the NYTimes just published an editorial on the rising price of drugs.

I really need to synthesis all of this data and put it into my upcoming write up on the drug industry. For the time being I will settle on quoting the nytimes editorial, given that it sums things up pretty nicely:

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The plight of patients who have recently been hit with a huge increase in their insurance co-payments for high-priced prescription drugs was laid out in The Times on Monday by Gina Kolata. Instead of paying a modest $10 to $30 co-payment, as is usually the case for cheaper drugs, patients who need especially costly medicines are being forced to pay 20 percent to 33 percent of the bill (up to an annual maximum) for drugs that can cost tens of thousands of dollars, or even hundreds of thousands of dollars, a year.

These drugs — what insurers call Tier 4 medicines — are used to treat such serious illnesses as multiple sclerosis, hemophilia, certain cancers and rheumatoid arthritis. And since there are usually no cheaper alternatives, patients must either pay or do without, unless they can get their medicines through some charitable plan.

There is little doubt that the so-called tiered formularies, in which co-payments rise along with the cost of the drugs, are a sensible approach for encouraging consumers to use the cheapest drug suitable for their condition. But the system seems to break down when it moves to Tier 4 drugs where co-payments can be huge and suitable alternatives don’t exist.

The insurers say that forcing patients to pay more for unusually high-priced drugs allows them to keep down the premiums charged to everyone else. That turns the ordinary notion of insurance on its head. Instead of spreading the risks and costs across a wide pool of people to protect a smaller number of very sick patients from financial ruin, insurers are gouging the sickest patients to keep premiums down for healthier people.

The health insurance system is so complex that it is hard to parse the blame for this injustice. The drug companies, especially the biotechnology companies, are at the root of the problem; they often charge exorbitant prices for monopoly drugs that were developed with heavy government assistance. Washington needs to rein them in by encouraging generic competition for biological drugs and allowing government programs to negotiate lower prices.

Employers, including the federal government, also bear responsibility. They have been pressing to reduce their prescription drug expenditures, and all health care expenditures, by shifting more of the burden to patients. One patient who had been paying only $20 for a month’s supply of a multiple sclerosis drug was shocked when the charge rose to $325 per month. (It has since been suspended.) Another patient found that his co-payment for a newly prescribed leukemia drug would exceed $4,000 for a 90-day supply, so he has deferred buying it.

If patients do without medicines or put off taking them, the likely result will be sicker patients, and higher costs, down the road.

What is not clear is whether insurers are primarily reacting to pressure from employers or are exploiting the situation to increase their profits. Congress needs to probe hard to find out how many patients are facing enormous drug bills and how best to protect them from medical and financial disaster.
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Sunday, April 6, 2008

Funding Microfinance

Micro-finance has been around for a while as a concept, but it only recently (i.e. in the past decade) became incredibly popular due to the work of Muhammad Yunus, the founder of the Grameen Bank. The Grameen bank has lent out billions of dollars to the poor in the form of "micro-loans," i.e. small loans that are generally less than a couple of thousand dollars in value. Muhammad Yunus won the Nobel peace prize in 2005 for his work.

Since the Grameen Bank came into existence, many other organizations have been founded in other parts of the world. These new micro-finance institutes, or MFIs, have emerged to perform similar functions as the Grameen bank performs in South Asia. These organizations generally specialize in a specific country or region. They operate by taking donated capital and lending it to individuals or groups in their country or countries of operation that are looking to start small businesses but have an unmet capital need.

To facilitate the average individual's desire to help alleviate poverty, websites have emerged that attempt to connect people with excess capital in the developed world with people with an unmet capital needs in the developing world. Two prime examples are Kiva and Ebay's MicroPlace. Both companies give statistics for the performance of the microfinance institutes that solicit money on their sites regarding delinquency and default rates. Microplace additionally offers to pay interest on the loan - though the rates are generally around 3%, which is below what a far more secure bond would pay out.

Currently there is a huge gap between the demand/need for micro-finance capital and the current supply. Many have suggested that the answer lies in securitization and the taping of the large pools of investor capital available from the international financial community. This would involve increasing the amount of reporting and oversite of the MFIs so that their loans can be appropriately rated. Mix Market was partially created for that very reason, though there are plenty of financial institutions that perform the work also.

But, this article entitled "
Microfinance’s Success Sets Off a Debate in Mexico
" from the NYTimes indicates that the debate still continues and there are plenty that wouldn't like to see Microfinance turned into a for profit institution.

Pre-Emption in the Drug Industry

Another big potential risk/cost for the drug companies is the threat of law suit due to their drugs having a negative impact on the people that use them. But - there is the possibility that that threat will soon be longer. Drug companies and the Bush administration have been pushing for the concept of "pre-emption", which is the notion that only the FDA should be allowed to regulate the drug companies - and not the courts. Accordingly, if a drug passes the over site of the FDA, a drug company should be immune from that point on to inspection. Given Merck's expected losses from Viox, as well as the damages that other companies have incurred from law suits, this could be a huge boon for the Pharmaceutical industry.
Drug Makers Near Old Goal: A Legal Shield