Innovation, Incentives, Drug Pricing and trade-offs

-Subtle shift in messaging from US democrats on what drug price controls might mean for innovation

-arguments by new nobel laurates, on a potential over emphasis on financial incentives vs “social capital”

This Statnews article (link end, Democrats’ new logic on drug pricing: Developing slightly fewer medicines is OK if it means lower prices) highlights the theoretical admission that a cap on incentives, or some form of drug pricing cap in the US, would lower the amount of innovation done.

Some politicians using a CBO report even put a number on it.

A saving of $345bn at the cost of 8 to 15 fewer drugs over a decade.

This is a very difficult question to answer, perhaps impossible. My sense is that the innovation cost is higher due to the positive spillover society gains from innovation. But, I also think there are other places in healthcare where there are better savings/efficiencies to be gained (preventative health, non-pharma-drug related interventions, social/education investments) – but that are politically even harder to manage. Still, it’s mostly the correct type of trade-off to think about.

This recent NYT article by  also raises some interesting points that financial incentives might be overplayed when thinking about policy. They argue:

“...economists have somehow managed to hide in plain sight an enormously consequential finding from their research: Financial incentives are nowhere near as powerful as they are usually assumed to be…” 

 They offer many case studies to support their view eg

“…We see it among the rich. No one seriously believes that salary caps lead top athletes to work less hard in the United States than they do in Europe, where there is no cap. Research shows that when top tax rates go up, tax evasion increases (and people try to move), but the rich don’t work less. The famous Reagan tax cuts did raise taxable income briefly, but only because people changed what they reported to tax authorities; once this was over, the effect disappeared.

We see it among the poor. Notwithstanding talk about “welfare queens,” 40 years of evidence shows that the poor do not stop working when welfare becomes more generous….”

“… The Alaska Permanent Fund, which, since 1982, has handed out a yearly dividend of about $5,000 per household, has had no adverse impact on employment….” (see picture)

They also claim it on CEOs, although here I’ve seen some evidence that financials have powered them.  They make the claim:

“…If it is not financial incentives, what else might people care about? The answer is something we know in our guts: status, dignity, social connections…”

This interests me as it argues for a larger weight on “social and relationship capital” than what we might have seen. They offer a policy idea (more education retraining credit, a Marshall plan for impacted regions where firms are subsidized to keep older workers – it would be interesting for an expert on Japan to comment on these ideas.

Statnews article: Democrats’ new logic on drug pricing: Developing slightly fewer medicines is OK if it means lower prices

NYT: Economic Incentives Don’t Always Do What We Want Them To 

Hans Rosling on Al Gore and fear

From Rosling’s Factfulness:

“We need to create fear!” That’s what Al Gore said to me at the start of our first conversation about how to teach climate change. It was 2009 and we were backstage at a TED conference in Los Angeles. Al Gore asked me to help him and use Gapminder’s bubble graphs to show a worst-case future impact of a continued increase in CO2 emissions. I had a profound respect at that time for Al Gore’s achievements in explaining and acting on climate change, and I still do. I am sure you got the fact question at the top of this section right: it’s the one question where our audiences always beat the chimps, with the large majority of people (from 94 percent in Finland, Hungary, and Norway, to 81 percent in Canada and the United States, to 76 percent in Japan) knowing very well what drastic change the climate experts are foreseeing. That high level of awareness is in no small part thanks to Al Gore. So is the enormous achievement of the 2015 Paris Agreement on reduction of climate change. He was—and still is—a hero to me. I agreed with him completely that swift action on climate change was needed, and I was excited at the thought of collaborating with him. But I couldn’t agree to what he had asked. I don’t like fear. Fear of war plus the panic of urgency made me see a Russian pilot and blood on the floor. Fear of pandemic plus the panic of urgency made me close the road and cause the drownings of all those mothers, children, and fishermen. Fear plus urgency make for stupid, drastic decisions with unpredictable side effects. Climate change is too important for that. It needs systematic analysis, thought-through decisions, incremental actions, and careful evaluation. And I don’t like exaggeration. Exaggeration undermines the credibility of well-founded data: in this case, data showing that climate change is real, that it is largely caused by greenhouse gases from human activities such as burning fossil fuels, and that taking swift and broad action now would be cheaper than waiting until costly and unacceptable climate change happened. Exaggeration, once discovered, makes people tune out altogether. I insisted that I would never show the worst-case line without showing the probable and the best-case lines as well. Picking only the worst-case scenario and—worse—continuing the line beyond the scientifically based predictions would fall far outside Gapminder’s mission to help people understand the basic facts. It would be using our credibility to make a call to action. Al Gore continued to press his case for fearful animated bubbles beyond the expert forecasts, over several more conversations, until finally I closed the discussion down. “Mr. Vice President. No numbers, no bubbles.”

I’m with Rosling on this. Rosling has passed. But here is Gore in 2019.

Upcycle Studios, Orestad; sustainable housing development, Lendager, NREP

Upcycle Housing Development

-Working example of how waste can be used in construction

-Lower carbon impact on contruction and running costs

-Comparable construction costs

Re-think. Reduce. Reuse. Recycle. Most of all re-think. Carlsberg Chair Flemming Besenbacher speaking at C40, Copenhagen. I visited a sustainable housing development made with upcycled materials at a 70% lower impact and 50% better energy running costs. 

While there are challenges in scaling and waste supply chain infrastructure, the developer + architects (NREP, Lendager) argued there were no insurmountable barriers to scaling this to cities world wide. 

The design and liveability is wonderful. The capital costs while c. 5% higher should come down in future projects.

The ethos behind this was similar to what my friend, Hana Loftus (of HAT Projects)  relayed to me about the Rural Studio project in Alabama, US and her time there.

The Rural Studio are fairly individual projects, made on very limited budgets. They won’t scale like Lendager’s hope to. But the principles and ethos those builder-architects go on to make, do last. 

They are examples of happening now, and happening for a while. 

Links

Hat Projects: https://www.hatprojects.com/projects/

Rural Studios: http://ruralstudio.org/

Article on part of the project: https://arcspace.com/feature/upcycle-studios/

And https://www.dezeen.com/2019/04/16/upcycle-studios-townhouses-lendager-group-copenhagen-recycled-materials/

And link to Lendager https://lendager.com/

And NREP https://nrep.com/

Dealing with email

Prof Alex Edmans (currently of LBS) writes this on dealing with email.

Excerpt from his recent Gresham Lecture series on modern day business skills, Links end .

Dealing with Email 

A McKinsey study found that the average interaction worker spends 28% of his day reading and responding to email.

This is likely a significant underestimate of the true cost of email for several reasons. First, interrupting a task to check email and then resuming the task leads to major inefficiencies, because it takes a while to get back into the swing of things. A study found that it takes 23 minutes and 15 seconds to resume a task after interrupting it (and that workers stay on a task for only 3 minutes and 5 seconds). Rather than checking email each time a new one is received, it’s much more efficient to “batch-process” email. Close Outlook, and potentially put on an internet blocker for a finite set of time. Once the time is up, you can then check email and deal with several all in one go.

Note that it’s better to put the internet blocker on for a finite amount of time (say half an hour), rather than keeping it on as long as it takes for you to complete your current task. Tasks often take much longer than you think, and the mind focuses better when there’s a clear end point. If you’re 25 minutes in and craving distraction, but know that the internet blocker will expire in 5 minutes, most people can hold out for those extra 5 minutes. If you’re taking a 30-minute spinning class and there’s 5 minutes left, you’ll push yourself until the end. But if your personal trainer asked you to ride an exercise bike until she says stop, you’ll put in far less effort.

Second, constant checking of email causes addiction and makes it difficult to focus even during “work” time. Checking email is similar to gambling. At slot machines, you usually lose money. But people get addicted to slot machines since there’s the rare possibility of a jackpot. Similarly, most emails are undesirable – a boss or client asking you to do a task. But we’re addicted to email because, once in a while we hit the jackpot – an email conveying good news, or from a friend we’d lost contact with. Thus, incessantly checking email makes us more addicted to “gambling” and requires us to keep feeding our habit, rather than being able to concentrate. I know of people who can’t even go to the toilet without using their phone at the same time, or have a drink or dinner with friends without constantly checking email. They think they’re saving the odd few seconds by dealing with email when the conversation gets boring, but this is far outweighed by the effect on their brains. Studies have shown that a constant craving for distraction changes the neuroplasticity of the brain – certain neural pathways form and others get closed down, which means that the same people find it difficult to focus when they get down to actually doing work. When you do a plank, you build up your core muscles which allow you to hold the plank for longer. Similarly, when you concentrate, you build up your mental “muscle” which allows you to concentrate for longer.

One solution is to take email completely off your phone. This might seem an unrealistic solution, because email is so essential to 21st century life. Yet I did this several years ago and have had no adverse consequences. But doesn’t this mean that emails pile up – don’t I end up wasting time on a subway ride when I could use it to deal with several emails? No. Because I still have email on my iPad, and so can deal with email when commuting or between meetings. The crux is that I can’t suddenly whip out my iPad if I’m having a drink and the conversation turns to a topic I’m not interested in, whereas I could with my iPhone. Having email only on my iPad and not my iPhone prevents me from “mindless” email checking while still allowing me to check email during downtime. If you can’t go without email on your phone, at least remove the buzz when you get a new email, and the notification “badge” which tells you how many emails are unread. If you go on your phone to use Google Maps, but see that there’s 5 unread emails, this begs you to check email – to see if you’ve won the lottery.”

This chimes a lot with what I have had to say on email – blog post here and here.

And it’s from Alex’s talk on time management – complete talk available here – write up here.

His series on businesses serving society also available through Gresham worth watching.

Goldman Sachs: climate change, Cities resilience

The ThinkTank part of Goldman Sachs writes a piece on climate change with a focus in cities.

Cities because as I’ve blogged before that the majority of people now live in cities. They are also a big source of our carbon impact.

They summarise:

Although the timing, scope and magnitude of the consequences of global warming remain uncertain, the potential risks are significant. Attention has focused on the need to reduce greenhouse gas emissions, and far more work will be needed here. Even as this work progresses, however, there will also be a need for adaptation efforts that can help the world withstand the potential effects of climate change.

Climate change could reshape the earth. Negative outcomes that could make adaptation critical in coming years include higher temperatures, more intense storms, melting glaciers, rising sea levels, shifting agricultural patterns, pressure on food and water and new threats to human health.

Cities will be on the frontlines of climate adaptation. Although the need for adaptation is likely to be widespread, we focus here on cities. Because they are home to more than half the world’s population and generate roughly eighty percent of global GDP, cities will find themselves at the epicenter of this challenge. Rapid urbanization in some developing countries will also likely sharpen the focus on cities.

Urban adaptation could drive one of the largest infrastructure build-outs in history. Greater resilience will likely require extensive urban planning, with investments in coastal protections, climate-resilient construction, more robust infrastructure, upgraded water and waste-management systems, energy resilience and stronger communications and transportation systems. Despite the uncertainty around the timing and scale of the impact, it may be prudent for some cities to start investing in adaptation now and to do so in ways that allow for maximum flexibility in the future – without committing to any one specific climate projection.

Given the scale of the task, urban adaptation will likely need to draw on innovative sources of financing. Even the most economically prosperous cities will likely need to look beyond tax revenues to other sources of funding, including central-government funds, public-private partnerships, institutional investors, insurance and, in developing economies, international financial institutions. “Soft” infrastructure, such as laws, regulations and markets that support financing, will matter too.

Adaptation may raise questions of fairness. Urban adaptation may raise questions of fairness – such as which cities can support adaptation and which cannot, or where limited resources should be directed within cities. This is likely to be true even in the most prosperous cities; the fact that many of the problems could prove to be local and specific could exacerbate this dynamic.

Available at GS here.

My interactive sustainability show here, Thinking Bigly.

Leadership / WeWork

Leadership at WeWork

-A reflection on WeWork

-On what it means to lead

-The problems of charismatic leaders

-The value of the S-1

[Update, ofc, the CEO has resigned now]

Much is being written on WeWork and the debate around its valuation as it has tried to list on Public markets. Scrutiny of the business, governance and the like. A friend mentioned in passing the other day how the regulation behind the S-1 filing document was one of the most-value adding pieces of financial regulation law of history. This episode seems to back this up, as the transparency that the S-1 filing has brought has cast a scrutiny  that may have been lacking before.

The law is the 1933 Securities Act - “An act to provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.”

There’s plenty of analysis of the business model and valuation. I’m interested in an assessment of the CEO as a person from what we can tell.

There has been analysis about its CEO and his “self-dealing” taking his trademark on “We” and selling it back to the company. Plus the side ventures WeWork has invested in, which closely align with the CEO’s personal interests, but seem further away from WeWork’s core business.

Namely a private school, a surfing/wave pool business, a natural food and an energy drink business. Plus WeWork has bought a private jet at $60m.

As a fundamental investor looking at company fundamentals and management - what it means to be a leader is an important question for me - although I know not for everyone.

When I’ve asked people, especially employees, what they look for - they tell me  they look to their leaders to reach out beyond themselves and beyond their own self-interest to a “wider purpose” to some purpose higher than themselves.

I sense this “purpose” led work - attractive to the younger generations - is becoming ever more important.

It’s one of the problems in the sense of “fairness” for executive pay.

When we see a CEO whose actions seem to have such self-interest to go along with the typical self-belief - typically needed - I don’t think people especially employees are inspired by that.

To me, that goes to the heart of the challenge with WeWork (and previously with the former Uber CEO) - it’s a challenge of leadership.

I know a multi-millionaire biotech CEOs who still travel economy as this means there is more money left to pursue the mission - save people’s lives.

So When Wework says this of its mission:

“When we started WeWork in 2010, we wanted to build more than beautiful, shared office spaces. We wanted to build a community. A place you join as an individual, 'me', but where you become part of a greater 'we'. A place where we’re redefining success measured by personal fulfillment, not just the bottom line. Community is our catalyst.”

And

“Create a world where people work to make a life, not just a living.”

I’m unsurprised that some have found jarring the CEO’s interconnection with what many view as his personal interests.

I am surprised neither the board nor a good friend/adviser has taken him aside and offered him other advice (or in the case of the investments sanctioned them).  

This twitter story by an early WeWork employee (number 17)  is also telling about how she wasn’t given options/stock. https://twitter.com/tristajaye/status/1162471350851817472?lang=en

Update: WeWork CEO has now gone. He’s still a billionaire though. 

Under-investment in Green Tech

-Humanity is under invested in green tech

-Plenty of investment in “content”

I’ve written before on how my sense is that we are under-invested in environmental technology. 

I was looking at investment in content from Apple and Netflix and it really hit home.

US Military R&D Only

$78bn

US Govt Green Tech

$3bn

UK Govt Green Tech

$0.8bn*

AstraZeneca Pharma R&D

$6bn

Apple, new TV content

$6bn

Netflix, new TV content

$15bn

*UK has this week promised another £1bn

Shell R&D spend = $1bn

Apple is spending $6bn this year in content for movies and tv.

Netflix is on track for $15bn spend (source FT, end).

Back, in 2015 this blog (see end) calculated it would take 34,739 hours to watch the whole Netflix catalogue.

And in 2018, Netflix added 1,500 of original content.

Assuming you could spare 2 hours a day, every day of your life to watch Netflix.

It would take around 49 years to watch the entire catalogue currently. And every year, at current rates. it would take you 2 extra years to watch.

So Netflix already has more content than a human can reasonably possibly watch in a life time and is spending $15bn more this year. Humanity will spend a few dollars a month to binge watch on TV box sets, but we’re not doing the same on pollution.

Meanwhile The US government can only spend $3bn on green tech funding, and Shell spends about $1bn on energy R&D.

Apple coming from nowhere is spending 6x more on content than Shell is spending on energy R&D.

OK. I understand that you can spend or only should R&D on project which are worthwhile but given the scale of the challenge in environmental challenges, and the huge returns to society / companies from solving some of our big climate challenges (eg fertiliser, energy, steel, aluminium, flying, mobility, etc. to name some).

This does seem a bit of a mismatch partly due to the returns to society and the externality cost being much harder to monetise appropriately, I guess.

No obvious answers from me - the known policy responses seem to be politically hard - although innovation investment seems clear to me.

https://automatedinsights.com/blog/netflix-statistics-how-many-hours-does-catalog-hold/

FT on content spend: https://www.ft.com/content/4f7f4326-c2bf-11e9-a8e9-296ca66511c9

Incentive Pay, CII update

Strong emphasis on time vesting awards:

CII overhauled its policy on executive compensation, urging public companies to dial back the complexity of pay plans for top executives and set longer periods for measuring performance for incentive pay. The new policy cautions against the pitfalls of performance-vesting awards and encourages companies to explore adopting simpler plans comprised of salary and restricted shares that vest over five years or more. The policy also recommends that companies consider barring the CEO and CFO from selling stock awarded to them until after they depart, to ensure management prioritizes the company’s long-term success. Although performance vesting share plans can work well for some companies, recent studies suggest they may not provide a strong enough connection to long-term company performance on a broad level, and use goals and metrics that can be numerous, overlapping, flexible and hard to understand.

CII notes:

For some companies, emphasis on restricted stock with extended, time-based vesting requirements—for example, those that might begin to vest after five years and fully vest over 10 (including beyond employment termination)—may provide an appropriate balance of risk and reward, while providing particularly strong alignment between shareholders and executives.Extended vesting periods reduce attention to short-term distractions and outcomes. As full-value awards, restricted stock ensures that executives feel positive and negative long-term performance equally, just as shareholders do. Restricted stock is more comprehensible and easier to value than performance-based equity, providing clarity not only to award recipients, but also to compensation committee members and shareholders trying to evaluate appropriateness and rigor of pay plans.

This is in line with work I’ve mentioned previously that Alex Edmans and Tom Gosling have done via the Purposeful Company.