And I should also give further credit-where-due, in noting that Ars has become one of my favorite feeds, due to its willingness to sponsor in-depth pieces, rather than the regurgitated press releases or shallow reviews of the product du jour that prevail at other outlets. Further case in point, this ongoing series on genome sequencing. Well done!
Says Fake Steve, with a blatant example of the NYT blowing the Zynga story, and then pounds it home:
"They're [the blogs] the ones who still dare to go for the throat, while their counterparts at big newspapers just keep reaching for the shrimp cocktail. As for the newspapers: Faced with their own demise, fearful of losing even more advertising, newspapers have made the huge mistake of becoming ever more timid, more cautious, more in bed with the companies they cover.
It's the exact opposite of what they should be doing. The truth is, if newspapers want to survive they should go back to doing what they started out doing -- muckraking, stirring the shit, calling bullshit. The other truth is, when these papers are dead, they will not be missed."
This was originally sent to the Instapundit reagrding his posts on biotech innovation. Since I found it as a comment here, I'm going to take it as being an open letter. I'd be pleased to credit the author if he or she will e-mail me:
"I read with interest your links today on pharmaceutical and medical device innovation, including an article of your which I had not seen before. While what both said is true, it overlooks perhaps *the* major source of innovation in this segment: venture financing of start-ups.
By way of introduction, I run a young biological tools company. Our products will contribute directly to creation of a new generation of pharmaceuticals and of diagnostic tests. At the moment we are funded entirely by NIH, as the venture capital market is moribund. I also serve as a frequent reviewer at both NIH and NSF, on both academic and small business panels, and for a dozen technical journals where research results are disseminated.
These days big pharma does very little research. The innovation comes from the small companies, and those that succeed often acquired by big pharma, or license their drug candidates to them so that the enormous costs of clinical trials are absorbed by the much larger partner.
These small companies live on what can be substantial investment (hundreds of millions of dollars each) by venture capital firms. So the ability of a company to raise money will depend on the VCs being able to generate enough after-tax income for their few successes to fund their failures. Obamacare is squeezing this on both ends. First, the capital gains rate is slated to increase substantially. Second, the revenue potential for the putative new products under whatever form Obamacare takes will undoubtedly decrease. This also affects company value for any potential IPO.
That makes this space a much less attractive investment. Of course companies will still be funded, but they will be far fewer in number and the pressure on them to produce will increase from what is already obnoxious. Since success is partially a numbers game, there will be fewer products that come to market.
No, a company cannot live on grants. A $2 million grant award is a large one, but this is typically the amount that a company raises from venture sources for its *first* funding round (of many). And winning grants these days is really, really challenging: success rates are on the order of 15%. It is nearly impossible to fund a company of any size from grants alone -- only the academics can live on grants since their salary and lab overhead is heavily subsidized by their institution.
I should also note that there are many overhead categories that government grants will not cover, such as intellectual property prosecution. The agency funds the work, and expects you to publish the results, but will not fund obtaining patents. There is a commitment to commercializing new products!
That to me is the major threat to innovation under Obamacare: draining the life blood out of the small-business corpus. That's where the innovation resides, and that's what appears will be hit the hardest."
This is both a gross privacy violation and a fascinating result. Seems some Finnish researchers managed to get their hands on that country's records of IQ tests of its soldiers. They then joined that data with several public databases to correlate the intelligence tests with not only income, but stock market participation and portfolio structure. Multiple regression and factors analysis ensued. The punchline:
...the consumption of smarter individuals, rather than the wealthy, may be what drives the pricing kernel. This latter conclusion is not currently featured in formal neoclassical models of asset pricing. However, it is consistent with neoclassical folk wisdom—that economic behavior, divorced from utility optimization, is irrelevant for market efficiency because savvy investors determine asset prices.
I write to urge you to oppose the health care ‘reform’ bill, so-called ObamaCare, that is currently before the Congress. I ask this for two main reasons:
The first reason is the disparate impact that this bill will have on your district. As you may be aware, the bill imposes a 8% employment tax on growing small businesses, raising the cost and discouraging the creation of new jobs. This is a grave error at a time when the national economy needs small business to lead a recovery in employment. It is specifically a problem for your district, as the formation and growth of startup ventures is key to its economic vibrancy, as well as that of the entire Bay Area. Further raising the costs of jobs here will reduce new venture formation, and send more jobs from growing ventures overseas. This will not only adversely affect your constituents, but will reduce the ability of the Bay Area to attract talent from around the United States and abroad.
Another disparate impact is that on biotechnology, now an important employer and source of growth here on the Peninsula. As you may be aware, the bill before Congress directly imposes taxes on medical devices, many of them created here. This will not only affect the ability of local ventures to grow, but will impose higher costs on those who most need such therapies. The indirect effect of the bill is as bad, if not worse. As a venture investor myself, I can attest that the effect of further regulation and the threat of ongoing political interference in an economic sector is to send investment fleeing elsewhere, to other sectors, or abroad. Both the economic health of your district, and the literal health of your constituents in the future will be adversely affected by this bill’s discouragement of investment and innovation in biotech.
The second major reason to oppose the bill is moral. In our free economy, employees and entrepreneurs alike trade their efforts and the literal time of their lives in the hopes of monetary rewards. How great an imposition is it to tell them how they must, or may not, spend those rewards to enhance their lives, including protecting them with insurance or therapies? Beyond the outrage of using such force against free citizens, the rationing and discouragement of medical advances that accompany government interference in healthcare will affect their very lives. It is apparently more convenient for our government to impose on American’s lives, than to honestly and openly fund medical transfer payments on the budget. American are unlikely to forget or forgive those who would so damage their freedoms.
(The original of this letter was handed in at the representative's San Mateo office yesterday.)
Good reading for anyone investing in consumer sector stocks, or consumer-facing startups. Not only is it a tough analysis of what lies ahead, but it assumes a recovery started in Q3. If, like myself, you see that less than one percent GDP growth as a self-serving number put out by a government that has largely p***ed away the stimulus money in unsustainable and unproductive directions, you may need to slide everything right by a few quarters as well.