12 ★ FINANCIAL TIMES Tuesday 3 March 2020
A race for a coronavirus cure is on, and
not wholly for altruistic reasons.
Investors too want to find the maker of
any treatment that can solve the crisis.
So far the most promising treatment
is remdesivir from Gilead Sciences.
Clinical trials of the US drugmaker’s
antiviral drug have been under way.
But Gilead is not alone. Inflated
expectations, including on China’s local
markets, for some drugmakers do not
reflect the experimental nature of any
hopeful treatment.
Remdesivir was originally developed
as an Ebola treatment. Last month,
Chinese biotech company BrightGene
claimed it could manufacture
remdesivir in large quantities. Its share
price had more than doubled in the
year to mid-February.
That rally was shortlived. The
Shanghai Stock Exchange reprimanded
BrightGene yesterday, saying that it did
not have approval to produce the drug.
BrightGene’s stock plummeted nearly
15 per cent. The company has only
sketchy analyst coverage. This
underlines the risk to investors in
biotech companies. Developing new
treatments is costly.
Remdesivir will hardly be a
blockbuster for Gilead. The drug, if
successful in getting to market, will add
less than $2.5bn in one-time revenue,
says Bank of America. Gilead’s group
revenues were $22.4bn last year.
That helps explain why shares of
Gilead, which have rallied since
January, have fallen more than
7 per cent since last Thursday. It is no
different for Chinese peers such as
Zhejiang Hisun Pharmaceutical, which
recently received approval to start
clinical trials of its own flu drug to treat
coronavirus symptoms. Those shares
have also turned down after gaining
nearly a third over the past month.
For most biotechs, success will be
elusive. One winner will take most of
the market.
A best-case scenario is being pricedCoronavirus/drugs:
speculative curesin. Getting closer to a cure is good news
for patients. For investors, the gamble
does not bear out the risks.Hiscox is best known for insuring the
fine art and classic cars of the wealthy.
The reality is far less glamorous: much
of its retail business comes from
providing small businesses with
protection. It is also rather less
lucrative. US underwriting losses have
helped wipe almost a third off its
shares since last July’s peak.
“Social inflation”, or US courts’
increasing propensity to award higher
damages against businesses, added toHiscox/insurance:
jury’s outunderwriting losses. There are few
signs this will reverse. Bosses could be
even more exposed to laws, passed last
year, that allow for claims related to
historical allegations of sexual abuse.
Armies of lawyers are happy to take
on such cases and are better funded
than ever. Speculative investors have
committed as much as $9bn to fighting
these cases, Bloomberg Intelligence
says, in the hope of rich returns.
Hiscox is responding by cutting its
directors’ liability exposure. Its focus
on smaller businesses protects it from
any supersized payouts. Small comfort
if, as expected, social inflation
continues to grow. Hiscox shares were
trading at a lofty 20 times forward
earnings multiple last year owing to its
US expansion plans.
Even after dropping to the highteens, litigation exposure means shares
are too expensive.
It is already coming off a modest
year. Pre-tax profits fell to just $53m,
or a 2 per cent return on equity. But
lengthier litigation is pushing up costs
and the time that capital must be set
aside in case of a claim. Across the US
settlements for the largest cases rose
from $28m in 2014 to an average of
$55m in 2018. Premiums are rising to
reflect these facts — whether they are
rising fast enough remains an issue that
concerns the whole industry.
Announcing the results, bossBronek
Masojadatried to ease investors’ fears.
But his assurance that direct exposure
to the coronavirus is relatively small is
more distraction than reassurance.
The only way investors can ease their
fears on this one is to bail out.For as long as millennials have been
adults, they have been unfairly blamed
for snubbing some popular favourites
of the past. Consider what has
happened to beer and breakfast cereal.
But in the case of Harley-Davidson,
maker of the motorcycle brand,
changing millennial tastes may actually
be the issue. The company is seeking a
new boss this week afterMatt Levatich
unexpectedly quit on Friday as chief
executive. His was a bumpy ride.
Since taking the helm in May 2015,
Harley has lost half its market value
even as the S&P 500 gained 40 per
cent. Revenue grew in only one of
Mr Levatich’s five years at the top.
Operating margins nearly halved to
about 11 per cent.
The US is by far Harley’s biggest
market, nearly 70 per cent. Hog-riding
baby boomers there are ageing fast and
making fewer purchases. The problem
for Harley is young people do not have
the spending power — or the interest —
to make up for that decline. Why spend
$20,000 on a loud, heavy motorcycle
when you can Uber, cycle, scooter or
use public transport to get around?
Harley has tried to appeal to younger
folk by launching lighter and more
affordable models. It also made a foray
into electric bikes with the LiveWire
last year. Neither initiative has gained
much traction, however. Motorcycle
shipment volume fell for a fifth straight
year in 2019.
Mr Levatich has made mistakes. He
failed to navigate President Donald
Trump’s tariff war two years ago. His
move to shift out of the US some
manufacturing to avoid EU tariffs
earned it the ire of Mr Trump. Bringing
in Harley’s first global brand president
last year was a fiasco; that person was
dismissed after just six months over
personal conduct violations.
There are no easy answers to fixing
Harley’s woes. Whoever becomes the
next Harley chief may simply have to
accept that the US market is in decline.
The group’s energy should focus harder
on attracting more overseas riders to
the famed American brand.Harley-Davidson:
running on emptyNokia once made mobile phones that
were gently mocked for being clunky.
Today the Finnish telecoms group is
the butt of less affectionate jibes.
Shares have lost a third of their value
over the past year. It has failed to
capitalise on security concerns over its
Chinese rival Huawei. High time, then,
for bossRajeev Surito leave after more
than a decade at the top.
IncomerPekka Lundmark, the
current chief executive of energy group
Fortum, is well qualified for the job.
This will not be a rushed transition; he
does not take over until September. By
then the company will also have a new
chair: its former networks chief,Sari
Baldauf. The new top team’s priority
must be to improve profitability.
The big question for Nokia is how it
can better profit from the move to 5G.
Operators will spend about $1tn on kit
to enable them to offer the latest
generation networks, estimates
industry body GSMA. There are
caveats to this, not least carriers’
reluctance to spend big when returns
are much further down the line — but
Nokia’s failure to exploit Huawei’s woes
is lamentable. Its failure is testament to
years, and money, diverted into the
glacial integration of Alcatel-Lucent,
bought in 2016. While it dallied, rivals,
led by Huawei, poured funds into R&D.
Nokia was further hamstrung by
producing far costlier 5G base stations
than rivals.
Market talk suggesting that further
M&A may be on the cards will be given
some ballast by the appointment of
Mr Lundmark, who has spent two
years at Fortum trying to wrest control
of its German rival Uniper. Investors
must hope the chatter is wrong: Nokia’s
record on M&A is not inspiring, given
the Alcatel-Lucent experience.
Donald Trump’s administration,
apoplectic that Huawei’s rise is at least
partly owing to the lack of a deep-
pocketed competitor, has suggested
that a US business buy a controlling
stake. That is not just ironic but also a
non-starter. The likes of Cisco, with
operating margins of 28 per cent, have
no desire to mess with the low-margin
5G infrastructure hardware market.
Even on an adjusted basis, Nokia’s
operating margin was 8.6 per cent last
year, well behind Ericsson’s 9.7 per
Nokia:
new boss, old problems
cent. At an enterprise value-to-forward
ebitda ratio of 6.6 times, Nokia trades
almost a fifth cheaper than Ericsson or
Cisco. Cheap but, rather like those
brick phones of yesteryear, not cheap
enough to merit buying.CROSSWORD
No. 16,415 Set by BASILISK
JOTTER PAD
ACROSS
1 American who wrote essay in
verse (6)
4 Popular writer in verse is moving
(2,6)
10 Disturbing process over time
inspires French director (9)
11 Shape the doctrine of public
relations? (5)
12 Key character that’s central to
authorial voice (4)
13 Irrational double standard
reinforcing a vacuous appeal (10)
15 Property right in the heart of
westerly French city (7)
16 Relating to the back part of
pilchard or salmon (6)
19 Timeless secrets could be hidden
here (6)
21 Yorkshire newspaper writer’s
article about cause of flooding (7)
23 Particularly unusual places I see
houses (10)
25 Keen to know more about fellows
shrouded in cigarette smoke (4)
27 Wife beset by heartless and
capricious demon is possessed (5)
28 One who claims poor serfs must
be radicalised (9)
29 Tramp trades daughter for
guaranteed value (8)
30 Diesel banned at regular intervals
in Greenland? (6)
DOWN
1 They may be left out of congenial
society (8)
2 Life model entices ex (9)
3 Memory burdened by amnesia’s
beginning to wander (4)
5 Going on and on endlessly about
mean individual (7)6 Expert on Britain involved in drug
scandal (10)
7 Fool with no time to get married
in characteristic style (5)
8 Swift upset leaders of
Enlightenment by mercilessly
lampooning new ideas (6)
9 Several engagements may
result in this large armed force
eliminating resistance (6)
14 Pleads with top players for
audience south of Bury (10)
17 Effect of numbers entering system
unsettled most of East Anglia (9)
18 The result of transitioning if
gender is manipulated digitally (8)
20 Produce a mark for each go in
some haste (7)
21 Admit (after a bit of thought) it
get’s on one’s wick (6)
22 Rising anger topped scale of
potential differences (6)
24 Writer suppressing case for
climate change (5)
26 Part of course that’s not
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127758( 5(62/9(Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLex
All work and no play makes Jack a
dull boy.Jack Dorsey’s life, replete
with Hollywood mansions and model
girlfriends, is hardly dull; but heading
up two groups is still too much.Paul
Singer’s Elliott Management, with a
4 per cent stake, wants to knock the
Twitter boss off his perch.
Twitter is bigger and needs more
attention. Mr Dorsey’s payments
venture, Square, has increased its
value 10-fold to more than $36bn
since listing in 2015. Twitter is up
only a whisker on its 2013 debut.
Shortly after its IPO, Twitter traded
on a giddy 20 times forward
estimated revenues — twice the
multiple then accorded Facebook
but justifiable, given the
microblogging site’s far smallerrevenues. But fast forward six (mostly
glory) years and Facebook expects
annual revenue of $86bn, 22 times
Twitter’s forecast take.
The trouble with Twitter can easily
be encapsulated in fewer than 240
characters: it is not remotely close to
replicating Facebook’s advertising
machine. Sure, Twitter is winning more
traffic — in the fourth quarter, daily
users jumped more than a fifth, year on
year, to 152m “monetisable” daily
active users. But that is still dwarfed by
Facebook’s 1.67bn.
While both are expected to expand
top line at roughly the same rate in the
next couple of years, Facebook’s
earnings are surging. So are those of
Square, by the way, which moved into
the black last year. Twitter’s 2022earnings estimates look at best flat on
those of 2018.
Elliott will hope to find someone
other than Mr Dorsey, a man of
undoubted entrepreneurial flair, to
fix Twitter. Even if he was to ditch his
chief executive role at Square in
favour of Twitter, his financial
interests would still be out of kilter.
His $4bn Square stake is almost
10 times greater in value than his
Twitter shares — only partially a
symptom of Square’s bigger price
appreciation. Most entrepreneurs
will never have a million-dollar idea.
Mr Dorsey can boast that he built two
game-changing, mega-billion-dollar
businesses.
But he owes it to shareholders of
both to pick one to helm.FT graphic Sources: Facebook; Twitter; S&P Global; RefinitivFacebook has left Twitter behind on revenue per user
Revenue divided by daily user numbers ( )TwitterFacebookSquare soars compared with Twitter
Share prices (rebased)SquareTwitterOperating earnings
RebasedTwitterFacebook
EstimateTwitter/Elliott: Jack of all trades
Activist investor Paul Singer hopes to remove Jack Dorsey from his role running Twitter. Unlike bigger social
media site and rival Facebook, the microblogging site has failed to increase revenues per user. Operating
earnings next year are also expected to be below 2018 levels, while Facebook’s could increase by half.MARCH 3 2020 Section:FrontBack Time: 2/3/2020 - 18: 52 User: joe.russ Page Name: 1BACK, Part,Page,Edition: LON, 12, 1