Financial Times UK 30Jan2020

12 ★ FINANCIAL TIMES Thursday 30 January 2020

Novartis offers a microcosm of the ills

of Big Pharma. It makes the most

expensive drug in the world, at $2.1m a

shot, and has added $27bn to its

market value since acquiring it in early

2018. Is this a laboratory experiment in
      the iniquitous evils of price gouging or
      a perfect prescription for creating
      value alongside a healthy society?
      For those suffering from spinal
      muscular atrophy, a rare wasting
      disease, the calculation is simple: a
      ghastly existence likely followed by
      childhood death or — rough sums —
      $30,000 a year. Case closed.
      For the less emotionally invested
      institution writing the cheques, the
      cost must be weighed against existing
      therapies. Novartis compares its one-
      off injection with the current $5m cost
      over 10 years for treatment in the US.
      Insurers can opt to pay by instalments.
      Investors have a different
      calculation. The research and
      development behind Zolgensma is a
      sunk cost: mostly paid upfront when
      Novartis acquired its developer AveXis
      (with its longer pipeline) for $8.7bn.
      Manufacturing costs are hundreds of
      thousands of dollars per dose but scale
      and efficiency should knock those
      down. Marketing barely touches the
      budget when it comes to cures for rare
      diseases. Patients and their doctors
      soon come knocking at the door.
      On the income side, unit sales of
      treatments for rare diseases will never
      be huge: Zolgensma won US regulatory
      approval in May and is up to about 100
      patients a quarter. But that will grow as
      it enters new markets and broadens
      out beyond patients older than two.
      Analysts are pencilling in sales of
      $1.5bn for the next few years. Liberum
      applies a back-of-the-envelope 50 per
      cent post-tax margin which pays off
      AveXis in six years, throwing in the rest
      of the pipeline for free. Recall, too, that
      cell and gene therapies — which
      Novartis reckons will make up a fifth of
      revenues within five years, up from

Novartis/Big Pharma:

dosing up

about 1 per cent now — are harder to

copy than pills. Rare disease drugs can

be good for wealth as well as health.

The Chinese love gold. In China it has

historically traded at a premium to

global prices close to the lunar new

year, a peak season for retail demand.

This year, the world’s biggest gold

consumer has been too busy battling a

deadly coronavirus outbreak to keep

with tradition. This is more than offset,

however, by increased demand from

global investors spurred by fears of the

same virus.

The price of the gleaming stuff has

Coronavirus/gold:

lustrous haven

gone on rising this month, adding to a

rally of almost a fifth last year. Gold

bugs aside, $1,560 an ounce might look

pricey. But a lasting reversal requires a

brighter economic outlook and moves

to normalise global monetary policy.

Those may not come for some time.

The unpredictability of the new virus

should weigh on sentiment, making

haven assets such as gold more

attractive. China might have to deal

with the resulting economic slowdown

with expansionary monetary policy.

Inflation from high food prices in China

will boost demand for the metal from

those who regard it as a hedge.

Similar situations exist elsewhere.

The US Federal Reserve’s reluctance to

raise interest rates makes holding gold

an easier choice. Additionally, global

central banks are likely to continue

hoovering up ingots. Purchases were up

12 per cent in the first three quarters

last year, according to the World Gold

Council. Along with investors in the

precious metal, miners stand to gain

from higher margins. Recent declines

in oil prices and emerging markets

currencies following the outbreak

should mean lower expenses and wage

costs. Production costs for the largest

producers are expected to be about

$975 an ounce this year, well below

gold prices today.

As uncertainty grows over whether

the outbreak will turn into a pandemic,

so should demand for havens. Inflows

to gold exchange traded funds this

month are a third higher than last

year’s average. Any correction to prices

— and that of the lustrous metal itself

— should be shortlived.

What just happened? This time last

year Apple chief executiveTim Cook

was issuing glum revised guidance

amid falling smartphone demand. Now

first quarter iPhone sales are up 8 per

cent to $56bn and Apple is celebrating

an estimate-beating three months for

both revenues and profits.

This is not the result of a

revolutionary new product. The iPhone

11 was released last September to good

reviews but was not considered radical.

Streaming service Apple TV+ was

supposed to be the smash hit of 2019

but lost momentum after a string of

ho-hum programmes.

Apple tries to focus investors’

attention on services and wearables —

both part of a long-term plan to

diversify away from smartphones.

Apple Watch and AirPods sales rose

by more than a third on last year. But

these are a fraction of the whole.

iPhone sales are five times the size.

The real success was smartphones —

the product Apple remains tethered to

for more than half its sales. Setting a

$699 price for the iPhone 11 — $

below the iPhone X — and offering

trade-ins led more people to upgrade.

It is a good time to be Apple. Lauded

for privacy initiatives, congratulated

on the 10-year anniversary of the iPad

and no longer forced to address fears of

peak iPhone sales.

Can it last? Probably. The share price

is likely to continue to be supported by

buybacks — although they will be

pricey. At the start of last year Apple

shares traded at a relatively cheap 12

times expected earnings. Now they

trade at 24 times.

So long as iPhone sales rise there is

no reason to expect that trend to

reverse. Gartner predicts global

smartphone sales will increase 3 per

cent this year, mostly because of sales

of new products capable of operating

on faster 5G networks. About a third of

iPhones are old enough to be replaced

according to analysts at Wedbush. By

the time Apple releases a 5G product it

could have up to 300m prospective

customers ready for an upgrade.

Apple:

core strength

One Goldman Sachs? A better idea
would be two or three. Yesterday,
Goldman delivered its most detailed
report of its diminished aspirations.
Return on equity, which hovered
around 30 per cent after the
millennium will struggle to return to

15. Yet the firm emphasised the
    principle it thinks could lead to its
    renaissance: a comprehensive
    commitment to serve clients tagged
    “One Goldman Sachs”.
    Tighter integration may make sense
    in some business lines. But what is
    clear from the data is that profitable
    Goldman businesses are subsidising
    nascent ones. The once-rollicking firm
    is now obsessed with cost containment.
    At the same time, some profitable
    businesses now directly compete with
    others. A far cleaner solution would be
    for Goldman to break itself up.
    That idea will horrify bosses who still
    believe the whole is worth more than
    the sum of its parts. But there is no
    reason for a nascent consumer lending
    business to be bound to a global M&A
    and IPO investment bank. Moreover,
    the bank serves private equity firms,
    which the Goldman asset management
    business is separately fighting for its
    own leveraged buyouts. This is not
    good for shareholders or employees
    whose dividends and remuneration are
    kitties for unproven businesses.
    Goldman is targeting a medium-term
    return on equity of 13 per cent.
    JPMorgan Chase, by contrast, hit 15 per
    cent in 2019. Goldman broke out that
    ROE by business line, showing that its
    investment bankers produced an 18
    per cent ROE last year. Asset
    management was at 14 per cent. The
    trading unit was 7 per cent, as
    regulatory and market changes
    crippled the one-time profit engine of
    the firm. And the nascent consumer
    business clocked in at just 3 per cent.
    The trading business, even if it has
    turned into a drag, could be worth
    pairing with investment banking.
    The trickiest decision involves
    Goldman’s new consumer deposit and
    lending business. ROEs in these areas
    can exceed 20 per cent but Goldman is
    years away from achieving those.
    Asking investment bankers to absorb
    the high investment costs with below-
    market compensation could lead to

Goldman Sachs:

a break-up is One option

further brain drain. Where would the

consumer business get the investment

capital it needs if the remainder of

Goldman Sachs stopped cross-

subsidising it? Easy, the standalone

Goldman asset management business.

CROSSWORD

No. 16,387 Set by CHALMIE

  



 

 



  



  



  



 

 

JOTTER PAD

ACROSS

1 Records white space replaced

by square (6)

4 Herb I see beside American

church (8)

10 Luxury cars about to get active

control system containing herb

(9)

11 About to impair ornament (5)

12 Goddess, one rejecting title (4)

13 Steals herb mixture when short-

winded (10)

15 To humiliate himself wore cat

out (3,4)

16 Wandering bulldozer ran

through walls (6)

19 Drinks a concoction including

some cuttlefish (3-3)

21 Act of contrition by last

character to leave coastal town

(7)

23 Storm heading off to stop

solitary heroine (5,5)

25 Shampoo used to be hot (4)

27 Avoid Spanish article due for

revision (5)

28 Farted about with gas mixture

at expo (5,4)

29 Scores left in knots (8)

30 Section missing from herb

discussion (6)

DOWN

1 Records Central Park herbs (8)

2 Notice herb in good French

game (9)

3 Actor Herbert turns up with

unknown but fabulous herb (4)

5 Soften cooked sausage (7)

6 Difficult to understand nice

throne being remodelled (10)

7 Angry one on speed (5)

8 Nearly nothing in charity chest

in the end (6)

9 Herb’s chromosome indicator

(6)

14 Display herb for European

publicist (5,5)

17 Alan let on about the number of

apples in an empty barrel (4,2,3)

18 Yorkshire town soak like

Rosemary? (8)

20 Boring work interrupted by

extremely tuneful laugh (7)

21 Asians with empty accounts

under pressure (6)

22 Herb trumpeting prelate not

fully organised (6)

24 Army unit adopts unfashionable

course (5)

26 Female head of state demoted

(4)

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Solution 16,

Wind speed in MPH

Temperature s max for day ̊C

at 12 GMT

Wind speeds in KPH Scale:

x = 55.

y = 50.

HIGH

HIGH

LOW

LOW

LOW

LOW

OCCLUDED FRONT LINE

WARM FRONT LINE

COLD FRONT LINE

ISOBAR BRUSH FRONT SYMBOLS

PRESSURE LABELS

1040 1040

1030 1030

1020

1020

1020

1020

(^101010101010)
1010
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1000
(^10001000)
1000
1000
1000
990
990
990
990
980
980
980
970 970
(^960960)
950 950
940 940
xxNAMExx
Amsterdam Cloudy 10 50
Athens Sun 18 64
B’ham Cloudy 12 54
Bangkok Sun 33 91
Barcelona Fair 18 64
Beijing Fair 5 41
Belfast Cloudy 11 52
Belgrade Fair 9 48
Berlin Rain 8 46
Brussels Cloudy 11 52
Budapest Cloudy 5 41
Buenos Aires Sun 27 81
Cardiff Rain 12 54
Chicago Cloudy 2 36
Cologne Cloudy 10 50
Copenhagen Rain 6 43
Delhi Sun 20 68
Doha Sun 23 73
Dubai Sun 22 72
Dublin Cloudy 11 52
Edinburgh Rain 11 52
Frankfurt Cloudy 9 48
Geneva Rain 8 46
Glasgow Rain 10 50
Hamburg Rain 8 46
Helsinki Sleet 2 36
Hong Kong Sun 19 66
Istanbul Shower 9 48
Jersey Rain 12 54
Lisbon Rain 16 61
London Cloudy 13 55
Los Angeles Sun 23 73
Luxembourg Rain 8 46
Lyon Rain 9 48
Madrid Cloudy 13 55
Manchester Cloudy 11 52
Miami Fair 25 77
Milan Sun 11 52
Montreal Sun -8 18
Moscow Snow 1 34
Mumbai Sun 28 82
Munich Fair 9 48
New York Fair 2 36
Nice Fair 15 59
Paris Rain 13 55
Prague Cloudy 6 43
Reykjavik Fair 0 32
Rio Thunder 35 95
Rome Fair 16 61
San Francisco Cloudy 15 59
Stockholm Cloudy 3 37
Strasbourg Rain 11 52
Sydney Sun 30 86
Tokyo Hail 17 63
Toronto Cloudy -2 28
Vancouver Cloudy 8 46
Vienna Fair 8 46
Warsaw Rain 5 41
Washington Fair 5 41
Zurich Rain 10 50
Today’s temperatures
Forecasts by
15
5
25
10
10
10 11
10
11
11
12
12
12
11
11
11
11
13
12
16
16
10
11
13
(^1613)
21
13
10
0
1
3
16
8
18
18
18
Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lex
Twitter:@FTLex
Security may top politicians’
concerns for 5G hardware. The focus
of struggling operators is on costs.
Dire European markets are one
reason Vodafone cut its dividend last
summer. Since then it has embarked
on asset sales to pay down debt. The
sale of its Egyptian subsidiary
yesterday follows that trend.
Saudi Telecom Company will buy
Vodafone’s 55 per cent stake in
Vodafone Egypt for $2.4bn, or seven
times trailing ebitda. The sale follows
other disposals such as its New
Zealand subsidiary last year and
comes ahead of a planned spin-off of
mobile tower assets this summer.
Chief executiveNick Readwants to
refocus the company on its core
European markets.
Cutting debt is sensible but Egypt is
one of the few regions where sales have
been growing. The risk is that
conditions in Europe deteriorate
further.
Europe’s problem is too many
operators. An abundance of mobile
data sparked a race to the bottom on
prices with operators vying for market
share.
Unfortunately for Vodafone, some of
its biggest markets — such as the UK,
Italy and Spain — are also the most
competitive. Vodafone recorded single-
digit revenue declines in each last year.
There are tentative signs, however,
that the worst is over. In the second
quarter, revenue decline in Italy and
Spain slowed slightly.
Mr Read believes cost-cutting will
offset these declines and keep
earnings steady until growth picks
up. Annual savings of €500m from
the integration of cable assets from
Liberty Global will help.
Ebitda is likely to grow 5 per cent
this year, say analysts. That will help
crank net debt down to about 3 times
ebitda in March. Splitting off the
tower assets should further reduce
that to 2.5 times by 2022, estimates
Citigroup.
Vodafone has underperformed
European telecoms shares, which
themselves hit a six-year low last
year. Its reception among investors is
unlikely to improve significantly. The
company’s self-help measures make
sense but competition in Europe will
remain intense.
FT graphic Source: company; Barclays research estimates
Reported
Underlying
-
Q    
-



Vodafone revenues by region
Year to March  (annual  change)
Source: S&P Global South Africa/Tanzania
Egypt
Other
Other Europe
Germany
Vodacom
UK
Italy
Spain
Turkey
- -   
Vodafone ebitda
 forecast ( of total)
Source: Citi






Germany
Italy
UK
Spain
Other Europe
Rest of world
Annual  change
European mobile phone service revenues
Vodafone: eurovision
The global telecoms group is selling its fast-growing Egyptian subsidiary. That fits with the group’s plan to
focus on core European markets, which account for three-quarters of earnings. Tough European competition
has pushed down contract prices and revenues for Vodafone and others. Signs of recovery in prices are faint.
JANUARY 30 2020 Section:FrontBack Time: 29/1/2020 - 19: 01 User: karen.crawcour Page Name: 1BACK, Part,Page,Edition: LON, 12 , 1