Whitney Tilson’s email on two more items of Wayfair furniture fail formaldehyde tests; an analysis of the price war between American and Spirit airlines; why we need Martin Shkreli; why the U.S. pays more than other countries for drugs; The Big Short.
Whitney Tilson: Wayfair fails formaldehyde tests
1) I published my fourth article on Wayfair yesterday – see below. Here’s a summary:
- Two more items of Wayfair furniture have failed the formaldehyde tests I commissioned.
- In total, 9 of the 10 Wayfair products I’ve had tested – five types of laminate flooring and five pieces of furniture, all made of composite wood and all but one from China – have failed formaldehyde tests.
- This high failure rate leads me to believe that the problem is systemic.
- Wayfair is, I think, learning what Lumber Liquidators learned the hard way: if you go to China and hit the low bid, odds are high that you will get tainted product of some sort: at best, very low quality; at worst, made of illegal or toxic materials.
- The next products I plan to test are items of baby furniture.
- To address this and protect American consumers, Wayfair (and other retailers of Chinese-made composite wood products, including Amazon) need to need to stop ignoring this issue and take action.
Whitney Tilson on Spirit Airlines
2) Last week I published my second article on Spirit Airlines. Here’s a summary:
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
- American Airlines rolled out an aggressive price-matching strategy in June that has impacted Spirit’s pricing and revenues.
- This is the major factor that has caused Spirit’s stock to be cut in half this year.
- With 62% higher costs, I question how long American can continue this strategy.
- I suspect it is more likely to be a warning to Spirit to pursue growth in markets not served by American.
- If so, it makes me even more bullish on Spirit’s stock.
Whitney Tilson: Why we need Martin Shkreli
3) I agree with this article that Shkreli is doing our country a favor by being so reprehensible in every way that he might almost single-handedly generate enough fury to overcome the power of the drug lobby:
“I’m going to maximize profits,” Shkreli said. “That’s what people [in health care] are afraid to say.”
One woman asked Shkreli how he would redo the past three months, if given the chance. After all, he was pilloried worldwide, scrutinized by regulators, and used as a political punching bag.
But Shkreli was unrepentant. “I would have raised prices higher,” he said. “That’s my duty.”
Even at a Forbes summit — a room packed with libertarians, industry executives, and Wall Street traders — there was more shock than awe.
“He either doesn’t care what people think, or he’s a sociopath,” one prominent pharmaceutical expert told me after Shkreli exited the stage.
Shkreli styles himself as a truth teller, saying the hard things that no one else is brave enough to reveal about health care. And in some ways, he’s right! Major insurers, drugmakers, and hospital systems collect billions of dollars in annual earnings … but cloak many profit-driven decisions by defending them as beneficial for patients. By being brutally honest about his motives, Shkreli is a rare exception. His comments may be odious, but they’re not baseless.
That doesn’t make them morally right, though. One reason we need Martin Shkreli is to protect against other Martin Shkrelis, who find ways to exploit the system and turn patients into profit centers. The cost of Daraprim — a drug that AIDS patients and others use to fight certain infections — went from $13.50 per pill to $750 per pill after Shkreli bought the rights to produce the drug.
Whitney Tilson: Why the U.S. pays more than other countries for drugs
4) Here’s a WSJ article on why the U.S. pays so much more for drugs than any other country:
Norway, an oil producer with one of the world’s richest economies, is an expensive place to live. A Big Mac costs $5.65. A gallon of gasoline costs $6.
But one thing is far cheaper than in the U.S.: prescription drugs.
A vial of the cancer drug Rituxan cost Norway’s taxpayer-funded health system $1,527 in the third quarter of 2015, while the U.S. Medicare program paid $3,678. An injection of the asthma drug Xolair cost Norway $463, which was 46% less than Medicare paid for it.
Drug prices in the U.S. are shrouded in mystery, obscured by confidential rebates, multiple middlemen and the strict guarding of trade secrets. But for certain drugs—those paid for by Medicare Part B—prices are public. By stacking these against pricing in three foreign health systems, as discovered in nonpublic and public data, The Wall Street Journal was able to pinpoint international drug-cost differences and what lies behind them.
What it found, in the case of Norway, was that U.S. prices were higher for 93% of 40 top branded drugs available in both countries in the third quarter. Similar patterns appeared when U.S. prices were compared with those in England and Canada’s Ontario province. Throughout the developed world, branded prescription drugs are generally cheaper than in the U.S.
The upshot is Americans fund much of the global drug industry’s earnings, and its efforts to find new medicines. “The U.S. is responsible for the majority of profits for most large pharmaceutical companies,” said Richard Evans, a health-care analyst at SSR LLC and a former pricing official at drug maker Roche Holding AG .
The reasons the U.S. pays more are rooted in philosophical and practical differences in the way its health system provides benefits, in the drug industry’s political clout and in many Americans’ deep aversion to the notion of rationing.
The state-run health systems in Norway and many other developed countries drive hard bargains with drug companies: setting price caps, demanding proof of new drugs’ value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost.
The government systems also are the only large drug buyers in most of these countries, giving them substantial negotiating power. The U.S. market, by contrast, is highly fragmented, with bill payers ranging from employers to insurance companies to federal and state governments.
Medicare, the largest single U.S. payer for prescription drugs, is by law unable to negotiate pricing. For Medicare Part B, companies report the average price at which they sell medicines to doctors’ offices or to distributors that sell to doctors. By law, Medicare adds 6% to these prices before reimbursing the doctors. Beneficiaries are responsible for 20% of the cost.
The arrangement means Medicare is essentially forfeiting its buying power, leaving bargaining to doctors’ offices that have little negotiating heft…
For the last two decades, I’ve felt that this is unsustainable – and been completely wrong…
Whitney Tilson on The Big Short
5) The cover story of this week’s New York Magazine is about The Big Short, the movie based on Michael Lewis’ book of the same name. See the review, main article and sidebars below – the magazine’s film critic calls it “the best film of the year? Possibly …”
It opens on Friday, Dec. 11th, but the first showings in NYC are the previous evening at 7:00 and 10:10pm at the AMC Lincoln Square, 1998 Broadway, at 68th St., so my wife and I have bought tickets to the 7:00pm show.
If you’d like to join us, you can buy an advance ticket here: www.fandango.com/thebigshort_186929/movietimes?date=12/10/2015
6) On Monday, I hosted a lunch in London for anyone who wanted to come and talk stocks. ~20 folks came and it was a fun and enlightening discussion. Thanks to Vestra Wealth for hosting it!