PrefBlog

Advanced students of economics, confidently exploring the most arcane niches of their field, will be fascinated to learn that after an extensive investigation, a US Senate committee has learned that private companies seek to maximize revenue:

The makers of a breakthrough drug for hepatitis C put profits before patients in pricing the $1,000 pill that cures the liver-wasting disease, U.S. Senate investigators said Tuesday.

A bipartisan report from the Senate Finance Committee concluded that California-based Gilead Sciences was focused on maximizing revenue even as the company’s own analysis showed a lower price would allow more patients to be treated.

Although the report focused on just one drug that has made headlines in the last few years, the lawmakers who led the investigation said their findings are a warning about what’s to come with other high-priced treatments for cancer, diabetes, Alzheimer’s and HIV.
…
“Gilead responsibly and thoughtfully priced Sovaldi and Harvoni,” said the company’s statement, noting that more than 600,000 patients have been treated worldwide since the introduction of Sovaldi two years ago.

But Wyden and Sen. Chuck Grassley, a Republican, said their 18-month investigation found that the high price tag significantly limited patient access and heaped huge costs on federal and state health care programs.
…
Other conclusions from the report:

— Gilead priced its first hepatitis C drug — Sovaldi — with an eye toward maximizing future returns from its follow-on medication, Harvoni.

— Gilead offered only meagre supplemental discounts to state Medicaid programs, and conditioned those on the states’ dropping any restrictions on patient access. The supplemental discounts of around 10 per cent would have been on top off other discounts that Medicaid programs get by law.

“The evidence shows the company pursued a calculated scheme for pricing and marketing its hepatitis C drug based on one primary goal – maximizing revenue – regardless of the human consequences,” said Wyden.

This startling conclusion will have the economics field abuzz for years – it’s revolutionary!

There will, of course, be the usual grousers who don’t like this idea; PrefBlog humbly suggests that they fund development of their own damn drugs:

A global coalition of charities and funding bodies has been formed to invest up to £30 million into restarting the development of promising drug candidates for neurodegenerative conditions such as dementia, motor neurone disease and Parkinson’s disease. The Neurodegeneration Medicines Acceleration Programme (Neuro-MAP), led by medical research charity MRC Technology, will identify promising drug projects that are no longer in development by the industry and help scientists to take them forward to the next stage, before returning them to pharmaceutical companies for further development into marketable treatments.
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As a coalition of 9 charities and funders, Neuro-MAP will help ensure that the potential of fundamental early stage research into neurodegenerative disease is realised, taking promising drug candidates forward towards clinical testing. It will also look to repurpose existing drugs and compounds for other conditions, for example, the use of hypertension drugs for the treatment of vascular dementia. The programme protects both charities’ and pharma’s investment and allows charities to maximise their impact on patient’s quality of life.

Partners in the Neuro–MAP are: Alzheimer’s Association US, Alzheimer Research UK, Alzheimer’s Society UK, ALS Association, Michael J Fox Foundation, MND Association, MRC Technology, Northern Health Science Alliance and Parkinson’s UK.

Some pioneering cranks have been doing this for some time:

The Cystic Fibrosis (CF) Foundation has sold royalty rights to treatments developed with support from its ‘venture philantrophy’ model. Royalty pharma – which accumulates royalty payments from established drugs – paid $3.3 billion for royalties on Vertex pharmaceuticals’ Kalydeco (ivacaftor).

The venture philanthropy model, adopted in the late 1990s, sees the foundation provide upfront funding for pharmaceutical companies to help reduce the financial risk of developing drugs to treat CF. It gave a total of $150 million to Vertex to support the company’s CF drug development program.
…
The funding provided by the CF Foundation is exclusively for the use of specific, negotiated CF research projects with a biotech or pharmaceutical company. ‘We negotiate legal agreements with strict parameters to ensure that every dollar invested is in the best interest of advancing [our] mission,’ a foundation spokesperson explained. ‘Virtually every CF drug available to patients in the US was made possible because of Foundation support.’

In an exclusive interview, a PrefBlog spokesman stated “I don’t expect anything much to come of it in Canada. People aren’t too bright and would rather pay crackheads to sleep on the streets.”

I am happy to report that the Sprott Silver battle continues, with a press release yesterday from Sprott:

Desperate Attempt by the Spicers to Preserve Fees

Proposed Transaction Betrays the Principles of Physical Bullion Investing and Subjects Unitholders to Increased Risks, Including Risk of Significant Redemptions

Previous Bullion Fund to ETF Conversion by Purpose’s Predecessor Resulted in Immediate and Massive Redemptions

Purpose Investments Can Walk Away With no Penalty After April 30, 2016, and GTU and SBT’s Paid Financial Advisor Hasn’t Provided a Fairness Opinion on the Transaction

No Credible Reason to Believe That the Proposed ETF Conversions Can be Completed – the Transaction May be Nothing More Than a Defensive Tactic
…
John Wilson, CEO of Sprott Asset Management, said, “The Purpose Investments transaction is an illogical proposition for GTU and SBT unitholders who made the choice to invest in a security fully backed by physical bullion. Unitholders should feel betrayed by the Trustees. After suffering from significant underperformance, gross mismanagement and questionable side payments to the Trustees and other friends of the Spicer family, unitholders are now faced with a Spicer-negotiated transaction that protects their fees and hypocritically tries to promote liquidity, marketing support and enhanced asset scale. These qualities are just a few of the benefits that Sprott is offering GTU and SBT unitholders, but at a premium and with certainty. Most importantly, through the Sprott offers, unitholders do not lose the distinct investment quality of holding bullion directly.”

Silver Bullion Trust has fired back:

Bruce Heagle, Chair of the Special Committee of Independent Trustees, stated: “It is regrettable but not surprising that Sprott’s latest press commentary delivers alarmist criticism and confusion in order to forward their own agenda. Sprott is the desperate party in this debate – they are seeking to draw attention away from the obvious deficiencies of their offer relative to the proposed ETF conversion. Your Independent Trustees recommend that unitholders ignore Sprott’s fear-mongering accusations, as Sprott is seeking to prevent unitholders from considering a better alternative to their inadequate, self-serving offer, which has yet to garner sufficient unitholder support despite seven extensions. All of the pertinent information regarding the proposed ETF conversion and its benefits to unitholders relative to Sprott’s offer will be in the Information Circular, which will be sent to unitholders shortly. Upon review of the forthcoming Information Circular and the benefits of the ETF conversion, I am confident that you will reach the same conclusion as your Independent Trustees: that the proposed ETF conversion in partnership with Purpose Investments is clearly a superior alternative to Sprott’s deficient offer. We thank unitholders for their patience and continued support of Silver Bullion Trust.”

There were two issues of bank NVCC-compliant sub-debt today – one from BMO:

Bank of Montreal (TSX:BMO)(NYSE:BMO) today announced a domestic public offering of $1 billion of subordinated notes (Non-Viability Contingent Capital (NVCC)) (the “Notes”) through its Canadian Medium-Term Note Program. The net proceeds from this offering will be used for general corporate purposes.

The Notes bear interest at a fixed rate of 3.34 per cent per annum (paid semi-annually) until December 8, 2020, and at the three-month Bankers’ Acceptance Rate plus 2.18 per cent thereafter (paid quarterly) until their maturity on December 8, 2025. The expected closing date is December 8, 2015. BMO Capital Markets is acting as lead agent on the issue.

… and one from Scotia:

The Bank of Nova Scotia (“Scotiabank”) (TSX:BNS) (NYSE:BNS) today announced a Basel III-compliant offering of $750 million of 3.367% Subordinated Debentures due 2025 (the “Debentures”) pursuant to its June 27, 2014 base shelf prospectus.

The Debentures, to be sold through an agency syndicate led by Scotiabank Global Banking and Markets, are expected to be issued on December 8, 2015. Interest will be payable semi-annually from the date of issue until December 8, 2020 at 3.367% per annum. From December 8, 2020 to maturity on December 8, 2025, the Debentures will pay a quarterly coupon at a rate of the 90 day bankers’ acceptance plus 2.19%, beginning March 8, 2021.

The mechanics of NVCC-compliant sub-debt were discussed in the post Royal Bank Issues NVCC-Compliant Sub-Debt. It’s interesting to see that that issue, from July 2014, was issued at 3.04%, resetting ha-ha to BAs+108 after their pretend-maturity. That was at a time when:

[July, 2014] The Canada 10-year is trading at around 2.20%, the five year around 1.55% and three-month BAs a little above 1.20%.

Great-West Lifeco was supposed to have supposed to have advised bank-owned CDS of the reset rate on GWO.PR.N today, but neither the company, nor bank-owned CDS, nor regulatorally run SEDAR has any news for you, you disgusting retail scum. Phone your broker and ask this simple question if you can get through the voice-menu, and while you’re at it, be sure to ask if he has any new issues he can sell you; if not, mail him a cheque anyway. This will help build a stronger Canada.

It was another mixed, mostly negative day for the Canadian preferred share market, with PerpetualDiscounts off 12bp, FixedResets down 33bp and DeemedRetractibles gaining 5bp. The Performance Highlights table is dominated by losers. Volume continued to be extremely high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.85 to be $0.96 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.12 cheap at its bid price of 12.31.

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Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 23.92 to be 0.54 rich, while MFC.PR.G, resetting at +290bp on 2018-3-19, is bid at 22.13 to be 0.43 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.79 to be $1.25 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.65 and appears to be $0.72 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.59, looks $0.77 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.66 and is $0.57 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.60%, with no outliers. There is one junk outlier below -1.50%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

I have a lot of sympathy for the central bankers of the world, as I’ve mentioned before: they cut policy yields to the bone, hoping thereby to get consumers spending and business investing, but all that happens is people drive up the value of real estate. It will take a long period of declines and stagnation before people look upon their houses merely as a place to live, and that hasn’t started happening yet!

To address this problem of what can credibly be argued is misdirected investment – into non-productive assets – politicians from all over have played God with their economies, micromanaging mortgage rules to ensure that only the right sort of people can get financing for real-estate. I deplore this, while at the same time agreeing that a problem is demonstrable.

I would prefer a broader-brush approach to bank capital, based on the precept that while change can be good or bad, rapid changes of emphasis in the economy are very often bad, evidence of bubbles rather than shifts in demand. For instance, mortgages as a share of Canadian bank assets increased from 30% to 40%, fueled by an enormous expansion of CMHC guarantees, and while I would not go so far as to say that is definitive proof of a bubble, I will say that it’s a big change and should be addressed in a cautious manner.

There are two approaches that can be taken: the first is to insist that for risk-management purposes, the loan-to-value ratio of a mortgage be calculated not according to the sale price or to the appraised value, but to an estimate of what this would have been five or ten years ago, adjusted for inflation. So, for instance, if we have a house that sold in 2014 for $567,000 and has a mortgage of $400,000, we would now currently say the LTV is 71%. I suggest that for regulatory risk purposes we use the 2009 price of $395,000, add on 10% to reflect plain vanilla inflation for a notional value of $435,000, and say OK, you’ve got to put up capital reflecting this notional LTV of 92%, which is a different kettle of fish altogether.

The second approach would simply say … 40% of your balance sheet is now mortgages, the average over the last ten years is 30%, the difference is 10% and 10% of that is 1%, so there’s a countercyclical capital surcharge of 1% that will be applied to your risk weighted assets. A solution would need to be more detailed, with meaningful categorizations of bank assets and threshold values for surcharges so that slow change is not discouraged, but that’s the general idea.

An Australian change of mortgage risk-weights last summer:

Under rules coming into force on July 1, 2016, the average risk weight on residential mortgage exposures will rise to at least 25 percent from about 16 percent, the Australian Prudential Regulation Authority said in a statement.
…
The regulator is forcing banks to shore up their capital after a government review last December recommended they should rank among the top 25 percent of lenders globally. The capital increase forms part of the regulators’ attempt to ensure the financial system can cope with any downturn in the housing market, where prices have climbed almost 30 percent in the past three years.

Australia & New Zealand Banking Group Ltd. Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Macquarie Group Ltd. will be affected by the new rules, which equate to increasing minimum capital requirements by about 80 basis points, APRA said. The cost of holding more capital may force the lenders to raise their mortgage rates, according to Morningstar Inc. and Bell Potter Securities Ltd.

… and the change appears to have had some effect:

Sydney home prices fell the most in five years in November as a regulatory crackdown forces banks to tighten lending and increase mortgage rates.

Dwelling values in Australia’s largest city dropped 1.4 percent from a month earlier, data from property researcher CoreLogic Inc. showed on Tuesday. That was the biggest drop since December 2010 and the first decline since May. Prices across the nation’s capital cities declined 1.5 percent, with Melbourne leading with a 3.5 percent decrease.

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions,” Tim Lawless, head of research at the firm, said in an e-mailed statement. “Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.”

The drop in home prices is yet another indicator of the cooling Sydney property market after mortgage rates close to five-decade lows and buying by foreigners sent prices up 44 percent in the past three years.

The regulator’s justification for the increase makes much more sense than the micro-economic arguments we’re hearing from Ottawa and the UK!

And in today’s drone news, Amazon has released videos and pictures about its developing Prime Air delivery service!

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It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 30bp, FixedResets off 42bp and DeemedRetractibles gaining 14bp. FixedResets comprised all of the bad part of the Performance Highlights table. Volume was extremely high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.30 to be $1.30 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.95 cheap at its bid price of 12.64.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.60 to be 0.49 rich, while MFC.PR.J, resetting at +261bp on 2018-3-19, is bid at 21.00 to be 0.62 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.90 to be $1.16 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 15.16 and appears to be $0.77 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.89, looks $0.92 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.82 and is $0.58 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.35%, with no outliers. There is one junk outlier below -1.50%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?