Archive for April, 2015

Resisting Oligopoly

Thursday, April 30th, 2015

comcast-time-warner-cable-merger-is-deadComcast spent tons on lobbying and image-burnishing philanthropy while its CEO golfed with President Obama, yet the telecom giant was blocked from carrying out its anti-competitive $45 billion acquisition of Time Warner Cable. It’s encouraging to see that large corporations do not always get their way in Washington.

Another good sign came a few days later, when two of the largest semiconductor machinery producers, Applied Materials of the United States and Tokyo Electron of Japan, called off their planned merger after the U.S. Justice Department said the deal would restrict competition. Another problem was that Applied Materials planned to reincorporate in Japan after the acquisition to dodge U.S. taxes.

It would be nice to think that these aborted mergers are signs of an antitrust revival in the United States, but there is more evidence pointing in the opposite direction. Large, competition-inhibiting mergers are being announced all the time.

For example, Teva Pharmaceuticals recently made a $40 billion bid for its generic drug rival Mylan NV, seeking to trump a $28 billion offer Mylan had previously made for a third company, Perrigo. Berkshire Hathaway and Brazil’s 3G Capital, which took over Heinz in 2013, are seeking to merge the company with Kraft Foods. Earlier, Staples announced plans to acquire one of its few remaining competitors, Office Depot.

Last year, AT&T proposed to buy DirecTV for $48 billion, Halliburton offered $34 billion for Baker Hughes, and Reynolds American announced plans to buy competing tobacco company Lorillard for $27 billion. The list could go on.

It remains to be seen whether the Justice Department and the Federal Trade Commission will block these deals. Chances are that most of them will be allowed to proceed intact or with only limited concessions. The Wall Street Journal reported in March that the FTC, facing pressure from Republicans in Congress, was revising its procedures in a way that might make it easier for deals such as Sysco’s proposed purchase of US Foods, which the agency had challenged, to go through.

Ironically, while U.S. antitrust policy may be weakening, China is beefing up its enforcement. It February, U.S. telecom and chip company Qualcomm was fined the equivalent of $975 million for violating the Chinese anti-monopoly law.

The sad truth is that oligopoly is increasingly the norm in the U.S. economy, and consumers feel the consequences. The low rate of overall inflation has dampened the impact, but the signs are there. As Andrew Ross Sorkin of the New York Times pointed out, the decline of competition in the airline industry through deals such as American’s purchase of US Airways has kept air fares high despite the savings the carriers are enjoying from plummeting fuel costs. The proposed acquisition of Orbitz by Expedia would not help things.

To reverse the troubling trend, what happened with Comcast needs to become the norm rather than the exception.

Tarnished Heroes of the Drug Industry

Thursday, April 23rd, 2015

tevaGeneric drugmakers are supposed to be the heroes of the pharmaceutical business, injecting a dose of competition in what is otherwise a highly concentrated industry and thus putting restraints on the price-gouging tendencies of the brand-name producers.

Just recently, the Food and Drug Administration approved a generic version of Copaxone, paving the way for the first multiple sclerosis medication that is not wildly overpriced.

Yet some generic producers are acting too much like Big Pharma. Israel’s Teva Pharmaceuticals just announced a $40 billion offer for its rival Mylan NV, which had recently made its own bid for another drugmaker, Perrigo. A marriage of Teva and Mylan would create the world’s largest generic drugmaker with more than $30 billion in revenue from customers in 145 countries.

Bigger would not be better, at least for customers. A stock analyst told the New York Times: “Last year taxes were one of the main drivers,” referring to deals in which Mylan and Perrigo reincorporated abroad to avoid federal taxes and Pfizer sought to do the same. “Now the main driver is getting bigger. Getting bigger gives you better pricing and better leverage.”

Even before the Mylan deal, Teva’s shining armor has been getting tarnished. Recently, its subsidiary Cephalon agreed to pay $512 million to settle allegations that it made questionable payments to other generic producers to keep their cheaper versions of the narcolepsy drug Provigil off the market.

Last year the Federal Trade Commission sued Teva and AbbVie for colluding to delay the introduction of a lower-priced version of the testosterone replacement drug AndroGel. While AbbVie filed what the agency called “baseless patent infringement lawsuits,” it also entered into an “anticompetitive pay-for-delay” deal with Teva. Mylan’s record also has blemishes. It once had to pay $147 million to settle price-fixing allegations.

A weakening of the deterrent power of generics is troubling at a time when the brand-name producers remain sluggish in their introduction of new drugs and are doing everything possible to milk their existing offerings. Their idea of innovation seems focused these days on what are known as “biosimilars,” close copies of certain brand-name drugs that are somewhat less expensive but much more costly than traditional generics. In March the FDA approved the first biosimilar, a cancer drug called Zarxio made by Sandoz. Pfizer indicated its intention to compete in this arena by announcing plans to acquire biosimilar pioneer Hospira.

Rising drug costs are, of course, a concern not only for individuals but also for taxpayers. The Medicare program, which thanks to the Bush Administration and Congress cannot negotiate with pharmaceutical companies, now spends about $76 billion a year providing drug benefits.

To be fair, Part D costs in recent years have been lower than the Congressional Budget Office had previously projected, but the CBO attributed the difference in large part to the increased use of generics. If generic producers continue to consolidate — and collude with brand-name producers — those savings will evaporate and we will be completely at the mercy of Big Pharma.

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New Resource: Greenpeace has introduced the Anti-Environmental Archives, a collection of thousands of documents on the efforts of corporations and their surrogates to undermine the environmental movement and government regulation.

Color-Coded Cancer Sticks

Thursday, April 16th, 2015

colorcodedcigsAt the headquarters of Reynolds American (parent of R.J. Reynolds Tobacco) in North Carolina and the Virginia headquarters of Altria (parent of Philip Morris USA) time is apparently running backwards. The two companies just filed a lawsuit in DC federal court that reads like it was written in 1995, not 2015.

The target of the suit (15-CV-00544) is the U.S. Food and Drug Administration, which the companies apparently have forgotten was given authority by Congress in 2009 to regulate tobacco marketing, including the introduction of new products. That law came after years of vociferous opposition by Big Tobacco.

What has the companies up in arms is an FDA guidance document issued in March concerning review requirements for packaging changes. The agency takes the position that certain modifications in background color, logo and descriptors can be significant enough to trigger the stricter rules regarding new products.

Presenting themselves as victims of government overreach, the companies argue that their First Amendment rights are being violated: “FDA’s unlawful actions already have harmed Plaintiffs and threaten greater harms in the future by restricting Plaintiffs’ ability to modify their product labels without FDA preauthorization and by chilling and restricting protected speech.”

Although the case does not involve the federal warning labels that have been required for decades, it makes the puzzling argument that the FDA guidelines also violate the industry’s Fifth Amendment rights against self-incrimination.

While it is not unusual for big business to assert free speech rights to oppose regulations, this position is particularly galling when it comes from the tobacco industry. These are the companies, after all, that for decades concealed and denied the hazards of smoking, asserting it was their right to “believe” their products were non-addictive and did not cause cancer despite the mountain of evidence to the contrary. Their dishonest claims were made all the more fraudulent when documents came to light indicating that firms such as Brown & Williamson (now part of Reynolds American) knew about the dangers at least as far back as the early 1960s.

The issue of control over tobacco packaging was already fought, and the industry lost. In 2006 a federal court, finding that the industry had caused “an immeasurable amount of suffering,” ordered it stop labeling cigarettes with designations such as low tar, light and natural that gave the misleading impression that they were safe.

Tobacco companies began using techniques such as package coloring to get around the restriction. In 2010 a New York Times article on the practice quoted Prof. Gregory Connolly of the Harvard School of Public Health as saying the industry was “circumventing the law.” He added: “They’re using color coding to perpetuate one of the biggest public health myths into the next century.”

At the heart of the new case is the tension between public policies designed to discourage tobacco use and the continued existence of an industry which has to attract customers to survive. The industry’s lawsuit, with its assertion of free speech rights, proceeds from the assumption that producing and selling tobacco products is a legitimate activity. A more appropriate premise might be that tobacco is a public health menace that should be controlled as tightly as possible until the last smoker has kicked the habit and the companies can shut down.

Big Tobacco would do well to stop wrapping itself in the Bill of Rights and acknowledge that it is lucky it is still allowed to sell its deadly products at all.

Note: This piece draws from my new Corporate Rap Sheets on Reynolds American and Altria.

Smokeless Tobacco and Toothless Regulation

Thursday, April 9th, 2015

snusIt took decades for the federal government to overcome tobacco industry deception and adopt warning labels for cigarette packages in the 1960s. It took three more decades before the Food and Drug Administration was given the authority to regulate both the content of tobacco products and their marketing.

Now a branch of the industry is seeking to turn back the clock with regard to a specific product. Swedish Match is petitioning the FDA to drop the customary dire warning requirements for its smokeless tobacco called snus, which is sold as small packages that the user tucks between the lip and the gums.

Giving in to the Swedish Match proposal for a “light” warning that in effect says that snus is not as harmful as cigarettes would begin to differentiate the regulation of different types of tobacco products. It would be a coup not only for Swedish Match but potentially for makers of e-cigarettes, who also claim to be selling something safer than regular cancer sticks. Swedish Match, by the way, does not sell cigarettes, but it does produce cigars and chewing tobacco.

Yet perhaps the worst impact of granting Swedish Match’s request is that it would begin to restore credibility to an industry whose level of irresponsibility is perhaps unmatched in the world of business. Let’s recall the history.

Warnings about the harmful effects of smoking date back at least to the early 1950s, when Reader’s Digest published a widely discussed article on the subject. Rather than address the underlying issues, Big Tobacco started promoting filtered cigarettes, especially the R.J. Reynolds brand Winston, as a supposedly safer alternative. Reynolds also tried to give a healthier allure to its unfiltered Camels with an ad campaign claiming they were smoked by more doctors than any other brand. Lorillard promoted its Micronite filter as the greatest protection in cigarette history (much later it came out that the filter contained asbestos).

The same thing happened after the publication of the famous 1964 Surgeon General report on the dangers of smoking. While refusing to acknowledge the growing body of evidence, the industry stepped up its marketing efforts and introduced new products, such as Philip Morris’s low-tar Merit brand, that deceived consumers into thinking they were less deleterious.

Along with the warning labels, Congress banned cigarette advertising on radio and television, yet the tobacco companies used other channels. Reynolds egregiously sought to hook youngsters with its ads featuring a friendly cartoon character named Joe Camel.

Philip Morris, whose parent company is now called Altria, took another tack that was also in its own way pernicious. Once it became clear that federal regulation was coming, the company jumped on the bandwagon but slowed it down by pushing for oversight only on marketing to children. The well-funded argument that smoking was a legitimate adult activity slowed the push toward more comprehensive regulation and caused countless deaths.

Although the industry eventually had to accept such regulation in the United States, it is doing its best to thwart protections elsewhere, especially in smaller and poorer countries. Philip Morris International, which was spun off by Altria into a separate company, has tried to bully nations such as Uruguay and Togo into abandoning strong anti-smoking policies by threatening to drag them into expensive legal proceedings under the auspices of the World Trade Organization.

Swedish Match may protest that it has not been involved in many of these practices, yet it is a dominant player in the market for chewing tobacco, which like cigarettes is linked to cancer. It is also worth noting that the company was built by Ivar Kreuger, whose financial empire turned out to be a Ponzi scheme that collapsed during the Great Depression.

Whether or not there are significant differences between the health effects of cigarettes and snus, federal officials should do nothing to weaken a regulatory system that remains vitally important for public health.

Note: This piece draws from my new Corporate Rap Sheet on Altria and Philip Morris International as well as a soon-to-be-posted one on Reynolds American.

Uncle Sam’s Favorite Billionaires

Thursday, April 2nd, 2015

william-erbey_416x416Inequality is becoming so pronounced that presidential hopefuls of all ideological persuasions are acknowledging that something needs to be done. One issue they should consider is the extent to which the federal government itself contributes to the problem.

It’s clear that the federal tax code is structured in a way that favors wealthy individuals and corporations. But it turns out that Uncle Sam is also providing direct financial assistance to the billionaire class. The extent of that assistance can be estimated from the data my colleagues and I at Good Jobs First assembled for Subsidy Tracker 3.0, which we released recently.

We compiled 164,000 company-specific entries for federal grants, allocated tax credits, loans, loan guarantees and bailout assistance provided through 137 programs overseen by 11 cabinet departments and six independent agencies. These were added to 277,00 state and local awards in the database. Since 2000 the grants and allocated tax credits have amounted to $68 billion; the face value of the loans and bailouts, which we tally separately, have run into the trillions.

Along with the release of Tracker 3.0, we published a report called Uncle Sam’s Favorite Corporations that described the extent to which large corporations dominate federal subsidies. Some of those companies are owned in whole or in part by the country’s wealthiest individuals and families.

I subsequently matched the big federal subsidy recipients to the companies linked to members of the Forbes 400 list of the richest Americans. This exercise was an extension of an analysis my colleagues and I performed on state and local data for our December 2014 report Tax Breaks and Inequality.

Of the 258 companies controlled by a member of the Forbes 400, 39 have received federal grants and allocated tax credits. Their awards total $1.3 billion. The richest of the billionaires linked to these firms is Warren Buffett, whose Berkshire Hathaway conglomerate accounts for $178 million of the subsidies.

Two of the other companies are worth examining more closely, because they have also been embroiled in controversies over their business practices.

At the top of the list is Ocwen Financial, which received $434 million in subsidies through a provision of the Home Affordable Modification Program (a part of the TARP bailout) that provided incentives to mortgage servicers to revamp loans to homeowners whose properties were underwater or otherwise unsustainable.

Ocwen, which made extensive use of that program, was founded by William Erbey (photo), whose net worth was estimated at $1.8 billion in the most recent Forbes list, published when he was still chairman of the company. Subsequently, Erbey had to step down as part of a settlement the company reached with New York State financial regulators to resolve allegations of improper foreclosures and other abusive practices. Ocwen also had to provide $150 million in assistance to those whose homes had been foreclosed. It is also paying a smaller amount under a settlement with California regulators.

While Erbey is no longer running Ocwen, he may still be a major shareholder. As of last year’s proxy statement, he held the largest stake in the company (15 percent); this year’s proxy is not out yet.

The second largest subsidy recipient linked to a member of the Forbes 400 is SolarCity, which has received $326 million in grants and allocated tax credits, mostly through Section 1603 of the Recovery Act, which provides cash payments to companies installing renewable energy equipment. The chairman of SolarCity is Elon Musk, better known for his role in the electric car company Tesla Motors (which, by the way, got a $465 million federal loan and later repaid it). Musk, whose cousins Lyndon and Peter Rive are the top executives at SolarCity, has a net worth estimated by Forbes at $11.6 billion. Tesla Motors has business dealings with SolarCity.

It was recently reported that SolarCity is being investigated by Oregon prosecutors in connection with allegations that it used solar panels made by federal prisoners in renewable energy projects at two state university campuses for which it received $11.8 million in state tax credits designed to promote local employment.

Assuming the allegations turn out to be accurate, it is difficult to know where to begin in stating all that is wrong with this situation. A company chaired by the 44th richest person in the country that has received hundreds of millions of dollars in federal subsidies used prisoners paid less than a dollar an hour to install solar panels so that it can collect millions more in state subsidies.

Subsidies, whether federal or state, are by no means the largest contributor to inequality, but policymakers should try to find some way to limit their use by billionaires, especially those linked to shady business practices.