B10| Wednesday, January 11, 2017 THE WALL STREET JOURNAL.
Big Pharma:
‘Take Your
Medicine’
It may be time for big
pharma to revisit an old, fa-
miliar problem: helping pa-
tients adhere to prescription
drug regimens.
Last year was a relatively
fallow one for new drug ap-
provals, while attempted
price increases on drugs al-
ready on the market at-
tracted unwanted attention
from politicians and regula-
tors. But improving patients’
ability to stick with doctor’s
orders marks an area of op-
portunity for drug companies
to generate growth.
The optimal adherence
range for patients on medi-
cines for chronic diseases is
about 80%, according to Dr.
Rajesh Balkrishnan, profes-
sor at the University of Vir-
ginia School of Medicine.
However, he adds, it isn’t un-
common to observe adher-
ence rates below 50% for cer-
tain drugs.
That problem translates
into a thinner top line for big
pharma. HealthPrize ,asoft-
ware provider that licenses
patient adherence programs
to third parties such as man-
ufacturers, estimates that
global pharma companies
missed out on $637 billion of
revenue in 2015 due to pa-
tients discontinuing treat-
ment early.
Granted, there are good
reasons for slippage from a
prescribed drug regimen.
Many drugs carry side ef-
fects, and some treatments
can be cumbersome. That
means improving patient ad-
herence isn’t easy. But tech-
nology such as smartphone
apps to engage and incentiv-
ize patients gives drug com-
panies new tools.
In a world where tradi-
tional avenues of growth
have been harder to come by,
improving adherence is an
area worthy of drug makers’
attention. — Charley Grant
HEARD ON THE STREET
Email: [email protected] FINANCIAL ANALYSIS & COMMENTARY WSJ.com/Heard
will propel more deal mak-
ing. Nomura Instinet analyst
Steven Chubak estimates
that an extra percentage
point of U.S. economic
growth in 2017 would trans-
late into a roughly 12% rise
in deal volumes.
But Mr. Chubak notes it is
far from clear that this tail-Which are the most patri-
otic U.S. car makers? By Don-
ald Trump’s apparent mea-
sure, Tesla Motors , BMW
and, yes, Ford Motor are the
improbable medalists.
The president-elect’s
tweets damning auto makers
that build factories in Mexico
have sent a chill through De-
troit. Having focused his ire
mainly on Ford last year—
and taken credit for a rever-
sal of its plan to build a new
plant south of the border—
Mr. Trump has this year
broadened his attack to in-
clude General Motors and
Toyota.
His target seems clear
enough: companies that relo-
cate manufacturing, and thus
jobs, away from the U.S. But
the American companies he
has picked actually make
most of their U.S.-sold cars
in the U.S.
Ford makes the equivalent
of 95% of the cars it sells in
the U.S. locally, according to
WardsAuto data for the first
11 months of 2016. For Gen-turers also figure highly in a
ranking of U.S. manufactur-
ers. BMW is a net exporter,
thanks to its huge base in
South Carolina, while the
number of cars Mercedes
owner Daimler makes in theU.S. amounts to 86% of its
U.S. sales. They may be for-
eign-owned, but like Tesla,
they face less pressure to
shift production to cheaper
countries because they
charge premium prices and
make fatter margins.
Ford is the odd one out: a
mass-market brand with pre-
dominantly local production.
Little wonder it wanted to
build that factory in Mexico.
—Stephen Wilmoteral Motors, the figure is
83%. The company Mr.
Trump should really be pick-
ing on, according to this
measure, is Fiat Chrysler :
The number of cars it makes
in the U.S. works out at just
69% of its U.S. sales.
Meanwhile, the company
with the most extensive U.S.
manufacturing base relative
to sales is electric-vehiclespecialist Tesla, which makes
all its cars in the U.S. and ex-
ports almost half of them.
While Tesla makes a fraction
of the vehicles of the big
auto makers, it could be hurt
if the Trump administration
rolls back the environmental
rules and subsidies that un-
derpin the electric-car indus-
try.
German luxury manufac-BMW sedans lined up for
loading in Charleston, S.C.BLOOMBERG NEWSMade in America
U.S.-made cars as a percentage of
cars sold in U.S., including exportsTHE WALL STREET JOURNAL.Source: WardsAutoNote: Jan. through Nov. 2016 *Includes AM
General, which makes the Mercedes R ClassTesla
BMW
Ford
Daimler*
GM
Honda
Fiat Chrysler
Nissan
Kia Motors
Toyota
Subaru
Hyundai
Volkswagen196%
116
95
86
83
81
69
67
59
57
55
50
30U.S. Car Makers’ Unlikely Patriots
India scrapped its high-
value cash notes last Novem-
ber, leaving people scrambling
to deposit or swap them. The
sudden change may even be
affecting international banks.
The aim was to clamp
down on the gray and black
economies but, in a country
where 70% of consumer
transactions by value are set-
tled in cash, everyone suffers.
More commercial activity
eventually should move to
bank-run payment systems
and increase deposits, boost
fees and help lending grow.
But in the near term, exist-
ing borrowers could suffer
more credit problems—espe-
cially small and medium-size
ones that rely more on cash.
For example, analysts at Jef-
feries estimate about 11% of
Standard Chartered ’s India
loan book could be exposed
to businesses where credit
risks will increase.
It just goes to show how
far the ripples of one peculiar
government policy can spread.OVERHEARD
M&A Boutiques Are Entering a Risky Place Under Trump
Financial stocks have ral-
lied hard since Donald
Trump’s victory, but not all
financiers will benefit
equally. Investors who have
bid up shares of boutique in-
vestment banks might be dis-
appointed.
Global merger activity
peaked in 2015. Total deal
volume declined 18% in 2016,
to $3.84 trillion, according to
Dealogic. But revenue booked
by M&A advisers fell by just
2%, because there is typically
a lag between when a deal
closes and when advisers get
paid. This itself suggests that
deal revenue is set to decline
further in the coming
months.
The case for optimism
rests with the notion that
faster economic growth un-
der a Trump administrationwind will be sufficient to
overcome several new obsta-
cles in the Trump era. For
one thing, higher interest
rates will make it costlier to
finance deals with debt.
Mr. Trump’s views on an-
titrust policy aren’t com-
pletely clear, but before the
election he spoke out
strongly against the AT&T -
Time Warner deal, saying it
would represent “too much
concentration of power in
the hands of too few.” He
similarly said that Comcast ’s
2011 acquisition of NBCUni-
versal “should never ever
have been approved.”
Mr. Trump may not look
favorably on mergers that re-
sult in job cuts, or deals in
which foreign acquirers seek
to take control of U.S. com-
panies.One major driver of M&A
activity has been outbound
deals by Chinese buyers. An-
nounced Chinese acquisitions
in the U.S. alone reached a
record $68.3 billion in 2016,
according to Dealogic, up
from $12 billion the year be-
fore. That is unlikely to con-
tinue under Mr. Trump. Such
deals often have foreign ad-
visers on the acquirers’ side,
but U.S.-based advisers will
still lose business from ac-
quisition targets.
Finally, as part of a
broader tax reform, congres-
sional Republicans have
drafted plans to eliminate
the corporate deduction for
interest-rate expenses.
Though it is far from certain
this will happen, it would up-
end how M&A has been prac-
ticed in the U.S. for decades.Listed boutique banks that
specialize in M&A, including
Evercore Partners , Green-
hill and Moelis , have rallied
an average 26% since Nov. 8,
compared with a 15% rise for
the S&P 500 Financials index
and 6% for the broader stock
market.
Advisers like these have
gained M&A market share
against big banks in recent
years, but they are more ex-
posed to M&A than the big
Wall Street banks.
These three boutiques
now trade at an average val-
uation of 18.3 times esti-
mated 2017 earnings, accord-
ing to FactSet, above the
five-year average of 17.4
times forward earnings.
Given the risks they face,
that seems too high.
—Aaron BackThrough the Cycle
Global announced M&A volumeTHE WALL STREET JOURNAL.Source: Dealogic$6024trillion2006 ’08 ’10 ’12 ’14 ’16The manufacturers
singled out make
most of their U.S.-
sold cars in the U.S.BYALISTAIRMACDONALDMARKETS
ers that “the differences can
be noticeable,” but said the
change was necessary because“the actual highs and lows hit
by the averages are more
widely followed by investors.”How High?
The Dow Jones Industrial Average has already crossed 20000, by an
intraday measure that went out of style in the 1990s.Sources: WSJ Market Data Group, FactSet THE WALL STREET JOURNAL.Note: Through Monday2020018800190001920019400196001980020000Dec. Jan. 2017'Theoretical' high
Actual highNov.One asset has taken an
early lead in this year’s refla-
tion rally: palladium.
The metal is up around 12%
in the first weeks of the new
year, outperforming most
other assets as investors con-
tinue last year’s trend of put-
ting money in more cyclical,
risky investments, such as eq-
uities and industrial metals.
That so-called reflation
trade favors assets that re-
spond well to economic
growth and inflation, and has
been driving markets since
Donald Trump’s election vic-
tory.
Palladium settled up 1.1%,
or $8.10, at $765.25 a troy
ounce on Tuesday.
But some investors worry
that the reflation trade is get-
ting crowded and is subject to
a sudden reversal. And regard-
ing palladium specifically,
some analysts are skepticalYear-to-date performancePalladium Shines
Year to date, palladium is one of global markets’ biggest
gainers, propelled by strong auto sales and the reflation trade.Sources: WSJ Market Data Group; FactSet; Ryan ALM THE WALL STREET JOURNAL.
Ingots of
palladium at
a non-ferrous
metals plant in
Krasnoyarsk, RussiaNymex palladiumGoldS&P 500Brent crude oil*Through 11:30 a.m. Tuesday in New York3.1%1.6%–4.3%11.9%the boom will last.
The metal is geared to the
auto industry, where sales may
have peaked after hitting re-
cord or near-record highs in
the U.S., China and Europe.
“There was a lot of specula-
tive investment at the end of
the year and it’s unlikely the
gains reflect a change in the
fundamentals,” said Simona
Gambarini, commodities econ-
omist at Capital Economics,who believes that car-sales
growth in China and Europe
will slow this year.
Around half of palladium
use is by the auto industry,
where it is used in the cata-
lytic converters that help filter
out pollution from engine
emissions.
Platinum, which is used in
diesel engines, was up 7.5%
this year during Tuesday’strading.
These metals’ gains are
steeper than year-to-date rises
of 1.6% for the S&P 500 and
4.3% for copper during Tues-
day trading. Those two mar-
kets have also benefited from
the reflation trade.
Last year, a fourth-quarter
surge in light-vehicle sales in
the U.S. pushed annual sales to
a second consecutive high. In
China and parts of Europe,
auto sales also hit highs last
year.
But analysts aren’t sure
that such breakneck growth
will continue. While U.S. sales
are expected to remain strong,
analysts don’t expect them to
break a record this year. In
China, consumers rushed to
benefit from a tax break be-
fore its scheduled expiration
at the end of the year.
Falling Chinese demand
“does not appear to be re-
flected in palladium prices at
the current point in time,”
Carsten Menke, a commodities
analyst at Julius Baer, said in
a research note.
Other factors could take the
sparkle out of palladium.
A higher gold price often
benefits other precious metals,like palladium. But rising U.S.
interest rates could help to
cap gold’s gains this year.
The metal has more trouble
competing with yield-bearing
securities when interest rates
rise.
Gold for January delivery
gained 70 cents an ounce, or
less than 0.1%, to $1,184.20
Tuesday on the Comex divi-
sion of the New York Mercan-
tile Exchange.
Palladium also may eventu-
ally suffer from its own gains.
Its recent strength along with
a runup in steel prices could
encourage more recycling of
metal from scrapped cars.
And while the demand for
this metal has been greater
than its supply, that deficit is
clouded by the fact that users
of the metal hold large inven-
tories, analysts say. Even for
those with a positive view of
the metal, big inventories pose
a risk if the higher price en-
courages holders to sell it on
or use it.
“Above ground stocks were
abundant... they are around 12
months of supply in invento-
ries,” said Robin Bhar, a com-
modities analyst at Société
Générale.Palladium Revs Up in 2017
Price of metal used in
car engines surges
after auto sales jump;
analysts see dangersCar sales may have
peaked after hitting
record or near-record
highs in big markets.Electric Co. hits its high at the
open, Procter & Gamble Co.
reaches its zenith at noon, and
International Business Ma-
chines Corp. peaks just before
the close. Each one counts
when the day’s theoretical
high is tabulated.
By this outdated measure,
the Dow crossed the 20000
threshold for the first time on
Dec. 13. The actual intraday
high that day was 19954, but
the theoretical high was
20048.
Since then, the Dow has
been over 20000 on a theoret-
ical basis on 13 additional days
through Monday. It was themost times that the Dow has
crossed a 1,000-point round-
number milestone by the theo-
retical intraday measure with-
out an actual close at the
milestone, according to The
Wall Street Journal’s Market
Data Group. The prior record
had been the 10000 level,
when the Dow’s theoretical
high reached the milestone
seven times before finally
closing over that level in
March 2009.
These days, of course, the
intraday price of the Dow is
calculated based on the mo-
ment-by-moment changes in
the prices of the stocks in theindex, and the Dow’s high (and
low) for the day is based on
those real-time calculations.
But for much of the Dow’s
120-year history, it wasn’t pos-
sible to compute those levels
quickly. And even when ad-
vances in computing power
made such calculations possi-
ble, the theoretical highs and
lows were considered impor-
tant indicators for technical
analysts.
The Journal continued us-
ing the theoretical highs and
lows in its daily charts in the
newspaper up until 1997.
When it switched to the actual
high, the Journal warned read-Tired of waiting for Dow
20000? Here is some good
news: By one measure, the
Dow Jones Industrial Average
already has crossed the 20000
mark.
Now for the bad news: It
did it only by a measure of in-
traday trading that went out
of style two decades ago.
The measure in question is
called the Dow’s “theoretical”
high, and it is computed using
the intraday highs of each of
the blue-chip index’s 30 com-
ponents.
It doesn’t matter if General
BYERIKHOLM
Dow 20000, by One Old Measure
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