TheChek News Flow

Big Pharma’s Newest Headache: Rival Drugmakers

The world’s best-selling drugs face new competition

One of big pharma’s most lucrative markets is starting to attract a crowd.

Drugs known as TNF inhibitors, used to treat maladies such as rheumatoid arthritis, have long been among the industry’s best sellers. Major brands include AbbVie’s Humira, Amgen’sand Pfizer’s Enbrel and Johnson & Johnson’s Remicade.

These drugs have been a blessing for pharma investors. Analysts expect the medications will account for more than $8 billion in fourth-quarter drug revenue when the companies announce earnings starting next week. Humira, the world’s best-selling drug, regularly accounts for more than half of AbbVie’s total revenue.

But U.S. competition is set to heat up. That includes new branded drugs as well as biosimilar drugs—similar versions of complex biological drugs that sell for a discount to the branded version.

Pfizer and Celltrion launched a biosimilar for Remicade late last year at a 15% discount to the Remicade list price. The Food and Drug Administration has approved biosimilar versions of Enbrel and Humira, although those launches haven’t yet taken place. A host of competitors are developing biosimilars of their own.

Meanwhile, Sanofi and Regeneron are likely to bring their new rheumatoid arthritis drug, sarilumab, to market later this year. Sarilumab showed greater efficacy than Humira in one trial that Sanofi and Regeneron conducted.

There are reasons to think the incumbent products won’t immediately face a steep decline. For starters, legal challenges have delayed biosimilar launches. Amgen said last fall it doesn’t expect to launch its Humira biosimilar in 2017 as a result.

These drugs also have years of real-world treatment success to their credit. Doctors are comfortable with prescribing them. It remains to be seen whether doctors will prescribe biosimilars as freely.

And on the branded front, sarilumab is awaiting FDA approval for just rheumatoid arthritis. The older drugs are approved for several other major indications.

However, investors shouldn’t get too comfortable with the idea that the good times won’t ever slow down. As more competition hits the market, the temptation grows to offer more rebates and discounts to maintain market share. That can cause revenue to drop even if a given drug’s market share is held constant. These drugs are important enough to the industry that small dips in sales can hit share prices.

This risk isn’t merely theoretical. While a price for sarilumab won’t be announced until regulators approve the drug, Regeneron Chief Executive Leonard Schleifer told investors at a conference last week that to compete in such a well-established market, his company would consider using price “as a weapon.” Those comments came before President-elect Donald Trump vowed to crack down on high drug prices at a news conference.

At a moment when the health-care industry’s attention is focused on the murky future of health-care policy, investors shouldn’t overlook the potential risks posed by old-fashioned competition.

Naguib Sawiris, the Egyptian billionaire who made his fortune building a telecoms empire extending from Algeria to Pakistan, is behind a deal to create a £3bn London-listed gold producer.

His family has a large stake in Toronto-listed Endeavour Mining, which on Friday revealed discussions with Acacia Mining, a fellow Africa-focused gold miner, over a “possible combination”.

They are pushing for a merger of the companies to create a pan-African gold company with the scale to rival Randgold Resources, London’s largest gold producer, according to sources familiar with the talks.

“On the face of it this appears a sensible African-focused fit,” said analysts at Investec. “A merged company would be of a similar production scale to Randgold.”

Acacia’s assets are in Tanzania, while Endeavour produces gold from mines in Mali, Ghana and the Ivory Coast. Combined, the two companies would have annual output of 1.5m ounces compared with the 1.3m ounces Randgold is expected to produce this year. Randgold is currently London’s largest listed gold miner with a market capitalisation of £6.29bn

Shares in Acacia rose 5.07 per cent to 439.6p on Monday, valuing it at more than £1.7bn, while Endeavour’s shares were down 0.48 per cent to C$22.72. It has a market capitalisation of about C$2.13bn.

Analysts said a merger of the companies was likely to garner support from institutional shareholders on both sides of the Atlantic providing the terms of the deal were sensible and did not favour one set of investors over another.

Acacia is 64 per cent owned by Canada’s Barrick Gold, but the company is believed to be willing to sell, having said its stake is noncore.

“The biggest weakness in Endeavour’s otherwise very robust investment case is the relatively short mine lives versus Acacia, Randgold and Centamin,” said Peel Hunt analyst Michael Stoner. “Acacia’s long-life Bulyanhulu mine is therefore likely to be the core asset around which the company is built.”

Still, one potential stumbling block is Canada’s tax law, which can make cross-boarder transactions tricky to pull off because it crystallises a capital gains liability. One solution, bankers said, would be a dual listing for the merged company and to issue a new class of exchangeable shares in Canada.

Endeavour is led by Sébastien de Montessus, a former Morgan Stanley investment banker in London who also worked for France’s Areva Group, the nuclear energy company.

He previously ran the Sawiris’ La Mancha Group, which in 2015 swapped a controlling stake in a mine for a 30 per cent stake in Endeavour and board representation. Mr de Montessus was named chief executive of the company in May.

Bankers said the chances of another suitor emerging for Acacia were low. “Everyone in the industry has had the chance to buy the Barrick stake if they wanted to,” said one mining banker.

Pulling Retirement Cash, but Not by Choice

Baby boomers’ mandatory withdrawals from 401(k)s, IRAs and other tax-deferred retirement accounts start in full force this year, touching off a massive shift of cash

The largest generation in U.S. history has to start pulling its retirement money this year, kicking off a mandatory movement of cash that could total hundreds of billions in the coming decades.

U.S. law requires anyone age 70 ½ or older to begin annual withdrawals from their tax-sheltered retirement accounts and pay taxes on those distributions. The oldest of the nation’s 75 million baby boomers cross that threshold for the first time this month, according to a U.S. Census Bureau estimate of when that demographic group began.

The obligatory outflows from 401(k)s and IRAs are expected to ripple through the U.S. economy, the stock market and a money-management industry that relies heavily on fees from boomers’ tax-sheltered savings plans and assets.

Boomers hold roughly $10 trillion in tax-deferred savings accounts, according to an estimate by Edward Shane, a managing director at Bank of New York Mellon Corp. Over the next two decades, the number of people age 70 or older is expected to nearly double to 60 million—roughly the population of Italy.

Firms that manage 401(k) plans are trying to persuade clients to reinvest their withdrawals in other products rather than spending or donating the cash to charity. It’s another pain point for many traditional money managers already struggling to keep some clients from shifting into lower-cost index-tracking mutual funds.

Many hope to offset the required distributions with inflows from millennials, people in their 20s and 30s—who recently became the largest living generation, even though boomers, at their peak, were more populous.

Savers, meanwhile, are debating what to do with their cash as they wrestle with tax bills triggered by required distributions and worry about outliving their assets. On average, men and women who turned 65 in 2015 can expect to live another 19 and 21.5 years respectively, according to the U.S. Social Security Administration’s most recent life-expectancy estimates; those post-65 expectancies are up from 15.4 and 19 years for those who turned 65 in 1985.

Jack Weaver, a retired biopharmaceutical product developer, turned 70 in late 2015 and had to pay taxes on his first required payout of $31,000 last year. “It’s unwanted income,” he said. He reinvested the money, and says his wife plans to do the same when she takes her first distribution this year.

The rise of the 401(k) is inextricably linked with the surge in U.S. citizens born after the end of World War II. Boomers, defined by the U.S. Census Bureau as people born in the 18 years beginning in “mid 1946,” embraced tax-deferred retirement accounts and made them a widespread savings tool in the 1980s and 1990s. The plans largely replaced traditional pensions, and helped create a multi-trillion-dollar industry supporting hundreds of investment firms and financial planners.

Contributions to tax-deferred retirement plans outnumbered withdrawals through much of the 1990s and 2000s. That flow began to reverse as boomers entered their retirement years earlier this decade.

Investors pulled a net $9 billion from workplace retirement-savings plans in 2013, according to the Labor Department. In 2014 the withdrawals jumped to net $24.9 billion. Full-year information for 2015 from the Labor Department isn’t yet available, but large mutual-fund companies that manage the bulk of U.S. retirement assets say outflows continue to rise. Fidelity Investments expects 100,000 customers to take their first required distributions in 2017, up from 91,000 in 2016.

The withdrawals thus far are small when compared with the roughly $15 trillion parked in U.S. tax-deferred retirement plans, according to a September 2016 estimate by the trade group Investment Company Institute. Brian Reid, chief economist at ICI, said asset gains could help cover some of the amounts retirees would have to withdraw.

Still, distributions are expected to grow exponentially over the next two decades because of a 1986 change to federal law designed to prevent the loss of tax revenue. Congress said savers who turn 70 ½ have to start taking withdrawals from tax-deferred savings plans or face a penalty. Specifically, retirees who turn 70 ½ have until April of the following calendar year to pull roughly 3.65% from their IRA and 401(k) funds, subject to slight differences in the way the funds are treated by the Internal Revenue Service. Then they must withdraw an increasing portion of their assets every year based on IRS formulas. The rules don’t apply to defined-benefit pensions, where retirees get automatic distributions.

The penalty for not taking distributions on time is a 50% tax bill on funds the retiree failed to withdraw.

The required distributions could come as a surprise to many boomers, said Alicia Munnell, director at Boston College’s Center for Retirement Research. “Individuals look at the pile of savings and think that’s their whole nest egg, not that they’ll have to pay some amount of that to the government,” she said. “It’s a very big deal when people realize they only have two-thirds or three-quarters of what they thought they had.”

Bronwyn Shone, a financial adviser in Pleasanton, Calif., said many of her clients aren’t aware of their legal obligation to take distributions. “I think some people thought they could let the money grow tax-deferred forever,” she said.

The outflows aren’t a surprise to most asset management firms, but they could force some dramatic changes. Firms will have to lower fees and offer more services to convince retirees to keep their savings at the firms, said Walt Bettinger, chief executive of brokerage firm Charles Schwab Corp. That would lower a firm’s profitability by raising costs per customer, he added.

Charles Schwab, which manages some $208 billion in 401(k) assets, typically has to move 10% of those funds around in any given year due to retirement, death or job changes. Mr. Bettinger expects that number to rise to 15% because of required withdrawals. “A 5 point increment of trillions in assets is a big number,” Mr. Bettinger said. “What’s happening is providers are having to be more aggressive to fill the gap.”

A Schwab spokesman said the company lowered fees on 401(k) plans about two years ago, by offering more low-cost options in exchange-traded or target-date funds. “We have been anticipating fee competition in 401(k)s for quite some time,” he said.

Ray-Ban Maker Luxottica to Merge With Lens Company Essilor, Creating $49 Billion Eyewear Giant

French lens maker and Italian maker of Ray-Ban and Oakley brands had been seen on collision course

In Snap IPO, New Investors to Get Zero Votes While Founders Keep Control

Snapchat messaging app creators Evan Spiegel and Bobby Murphy are expected to retain more than 70% of voting power; pre-IPO investors get less-powerful voting shares

Like many technology entrepreneurs, the founders of Snap Inc. want to retain management control of the virtual-messaging company, even as they sell shares to the public.

In one respect, the men are going further than tech firms typically do: Investors won’t get any voting power with shares purchased in Snap’s initial public offering, according to people familiar with the matter.

That leaves key decisions, such as the makeup of the board, primarily to Evan Spiegel and Bobby Murphy, co-founders of Snap, the owner of the disappearing-message app Snapchat. The two are expected to hold more than 70% of the voting power despite owning roughly 45% of the stock, the people said.

Companies with multiple classes of stock typically give IPO investors fewer votes per share than they give to founders, executives and early private investors.

The power of the “supervoting” shares is typically diluted over time as new shares are issued. But Snap’s decision to sell nonvoting shares is extreme. Messrs. Spiegel and Murphy’s proportional voting control wouldn’t materially change when new shares are sold because the common stock doesn’t have voting rights.

The setup evolved from a similar arrangement Snap had with its private investors, who received nonvoting shares in Snap’s recent private funding rounds, according to the people familiar with the matter. The pre-IPO investors will receive voting shares with less power than those held by the two founders, the people said.

Mr. Spiegel has considerable leverage as Snap plots its IPO, which could come as soon as March and value the business at between $20 billion and $25 billion, people familiar with the matter have said.

The company’s bankers and executives see the 26-year-old as a selling point to investors and plan to portray him as a visionary who knows how to create products for his coveted millennial peer group, The Wall Street Journal has reported.

The recent scarcity of tech IPOs could work in Mr. Spiegel’s favor. In 2016, 26 technology companies went public on U.S. exchanges, raising $4.3 billion, the lowest number and dollar volume since 2009, according to Dealogic.

“If you’re the only supply in the market, you’re well positioned to dictate the terms,” said Triton Research LLC Chief Executive Rett Wallace, whose firm collects and analyzes data on private companies.

Family-run companies in media and other industries have long used different classes of stock to keep control. At News Corp, which owns Dow Jones & Co., publisher of The Wall Street Journal, Rupert Murdoch and his family maintain greater influence through a dual-class setup. Class A shares that make up about two-thirds of the equity base have no voting power, while Mr. Murdoch and his family trust hold about 39% of the Class B voting shares.

Many tech companies prefer the setup because it allows them to innovate without risking a shareholder revolt. And such structures can thwart activist investors, who sometimes try to rally other investors to vote out a company’s board.

Between 2012 and 2016, roughly 19% of U.S. tech firms that went public did so with dual-class structures—more than double the share over the prior five-year period, according to data assembled by University of Florida Professor Jay Ritter. In 2016, 21% of tech firms went public with dual-class structures, down from 37% in 2015. Around 11% of all non-tech U.S.-listed IPOs used dual-class structures in 2015 and 2016.

Some big investors contend that dual-class structures unfairly remove public shareholders from the decision-making process. The California Public Employees’ Retirement System, the largest U.S. public pension fund by assets, recommends companies adopt a “one share, one vote” structure. Last month, Calpers sued to block Barry Diller’s IAC/InterActiveCorp from issuing nonvoting stock. Gregg Winiarski, IAC’s general counsel and executive vice president, said in a statement the lawsuit is without merit.

Snap decided to create this nonvoting share class at the outset to be transparent with investors that the founders wanted to stay in control for the long term, rather than seek to make such a change later, according to people familiar with the process.

The setup includes some features meant to protect public investors. If the founders’ ownership of the outstanding stock falls below around 30%, all shares automatically convert into common stock, according to people familiar with the deal. If either founder dies, his shares cannot be transferred, the people said.

The use of multiple voting classes doesn’t seem to have damped interest in tech offerings. The difference in post-IPO performance between dual-class companies and non-dual-class companies isn’t statistically significant, both among tech companies and all U.S. listings, according to Prof. Ritter.

The 2004 Google Inc. IPO has served as a model for other tech companies. Ahead of the offering, founders Larry Page and Sergey Brin said the structure would protect the company’s “ability to innovate and retain its most distinctive characteristics.” Messrs. Page and Brin, along with the company’s executive management team and directors, controlled more than 60% of the voting power after the IPO.

In 2014, Google, now known as Alphabet Inc., changed its structure and added a new class of nonvoting shares that would keep control of Google with Messrs. Page, Brin and Executive Chairman Eric Schmidt after the company issues more stock. As of April, the three men had 59.6% of the voting power of the company’s outstanding stock, according to a regulatory filing.

Facebook Inc. has moved in a similar direction. The company, which went public with a dual-class structure in 2012, last year said it would create a new class of nonvoting stock to allow Chief Executive Mark Zuckerberg to maintain control.

The move came several months after Mr. Zuckerberg informed the company’s board that he planned to donate 99% of his wealth to the Chan Zuckerberg Initiative LLC, an entity he created with his wife to donate to nonprofits and make private investments toward causes such as curing disease and education. Absent this change, Mr. Zuckerberg would have been likely to lose control over time as he donated his Facebook shares.

Investors have sued Facebook over the change. “Facebook is confident that the special committee engaged in a thorough and fair process to negotiate a proposal in the best interests of Facebook and its shareholders,” a spokeswoman said.

FT Confidential Research data predict rising sales, though tax increase will drag

Our monthly and quarterly surveys point to robust demand for vehicle purchases among Chinese consumers, with notable strength among third-tier city residents.

We nonetheless expect sales growth to slow this year. Strong 2016 sales partly reflected front-loaded purchases by consumers in expectation that tax breaks would be removed.

Volkswagen remained the most popular brand in our latest quarterly Consumer Brands Survey, though subsidiary brand Audi has eroded its lead over the past year.

Monthly and quarterly consumer survey data from FT Confidential Research point to another year of robust car sales in China. A reduction in a government tax break may slow sales growth from the double-digit increase recorded in 2016, but our data indicate continued strong demand, particularly in second- and third-tier cities.

Our measure of car buying sentiment among Chinese consumers hit an eight-month high in December, on a three-month moving average basis. In 2016, car buying sentiment was as strong as it has ever been, averaging 56 (where any reading above 50 indicates positive sentiment).

Sentiment has usually been strongest in first-tier cities (see chart), reflecting higher incomes that support demand for vehicle upgrades, bolstered by expectations that city governments will tighten restrictions on non-local vehicles to control congestion in the country’s biggest urban centres.

But demand in lower-tier cities has also strengthened. Our December survey found an improvement in third-tier cities, with the tier’s sub-index overtaking that for second-tier cities for the first time in 33 months.

Furthermore, there was a striking fall in the percentage of second- and third-tier city residents saying they did not plan to buy a car in the coming 12 months in our quarterly Consumer Brands Survey (see chart).

Building on a bumper year

Will this mean another strong year for car sales? Much hinges on government policy. Passenger vehicle unit sales rose 13.7 per cent last year to a record 24.4m, according to the China Association of Automobile Manufacturers (CAAM), including a 44.6 per cent increase in Sport utility vehicle (SUV) sales (see chart). We expect industry sales growth to slow but remain in the high single-digits in 2017.

Sales of vehicles with engines of 1.6 litre and under rose 21.4 per cent last year, accounting for 72.2 per cent of total passenger vehicle sales, up from 66.5 per cent in 2013. Sales of vehicles with smaller engines were boosted by a cut in purchase tax from 10 per cent to 5 per cent in October 2015 — we believe our Auto Purchase Sentiment index rose in the final months of 2016 on expectations that this cut would be reversed entirely. This was particularly true in third-tier cities and below, where smaller vehicles are more popular. 

In fact, the government only raised the tax rate to 7.5 per cent. This increase, plus the likelihood that some purchases that might have been planned for this year were brought forward into 2016, will weigh on auto sales growth this year.

Yet, by following the same logic, the slowdown may not be as sharp as some expect. The Ministry of Finance has signalled plans to restore the purchase tax to 10 per cent in 2018, which should mean further front-loaded purchases this year.

Volkswagen leads brand pack

Shrugging off the emissions scandal, Volkswagen remained the most popular brand among Chinese consumers in 2016, although its lead was eroded by its own Audi marque (see chart).

We believe this reflects increased demand to upgrade to luxury vehicles. Other German brands also gained in our survey. Mercedes-Benz may have delivered more cars globally in 2016 than rival BMW, but the latter was the more popular brand in our survey, up 1.7 percentage points year on year.

Indeed, German brands performed very well in our survey, rising 2.8 percentage points year on year as a group, while the popularity of Chinese brands slid 1.7 points over the same period.