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Tuesday, 27 February 2018

The disappearance of the big conglomerates and their large research laboratories marks the current Age of Pennywise, Poundfoolish…

In the age of shareholder value and pennywise, poundfoolish corporate behaviour…, the disappearance of the so-called ACME companies and their large laboratories for fundamental and targeted research will have a negative influence on human development. Many of their inventions in the fifties and sixties of last century colour our daily lives in the 21st Century. Now that those laboratories have gone foregood under pressure of spoilt shareholders, there will probably be an “invention gap” in the second half of this century.

ACME (i.e. A(merican) Company Manufacturing Everything) was the universal all-purpose company from the Looney Tunes cartoons that supplied eternal anti-heroes like Elmer Fudd and Wile E. Coyote with an endless flow of fireworks and explosives, building material, electronics and whatever you could think of, to help them catch their drawn adversaries: you name it, they got it.

In real life, there were also a number of such ACME companies in the last Century: ITT, AT&T, General Electric, Siemens, Philips, Hitachi and Sony were companies that sold almost everything electronic and non-electronic to the whole world. Their products ranged from airplane motors to computers, telephones, batteries, cassette tapes, generators, trains, CD players and draglines.

Almost all these large companies had large laboratories where not only targeted, but also fundamental physical and chemical research was done. All this research led to countless inventions and new developments. The unbelieveable standard of life in the 21st Century would not have been possible without the efforts and achievements of these laboratories of these and other multinational companies.

However, as of the Nineties of last century, the urge for higher profits and elevated shareholder value forced many multinational companies to abolish their big laboratories, as they were “not efficient enough, not visible in the short-term annual results and much too expensive to be maintained”.

This happened to Philips that largely abandoned their worldfamous NatLab in the Nineties and Zeroes: initially under pressure of a threatening bankruptcy, a.o. as a result of the excessive expenditure of the laboratory and a series of costly flops and blunders that squandered the company's profits. Later as the consequence of a series of cutbacks by subsequent CEO's. 

It also happened to many other companies, like for instance AkzoNobel that sold their top-notch pharmacy branch Organon.

Fashionable expression like focus (i.e. focussing on one or two successful core activities while abandoning the other, less important or profitable activities of the companies) and shareholder value (i.e. maximization of the profit and dividend payments towards the shareholders) got hold of the boardrooms of the large companies, driven by  aggressive, gung ho shareholders

These shareholders made the executives focus on the (easy) short term profits and revenues, instead of on the long-term where the harder to get, but really interesting profits and revenues lie.

A few weeks ago, the Dutch, Nobelprize-winning professor Ben Feringa spoke about this phenomenon in Davos, while pondering about the start of his career at the Shell Laboratories in The Netherlands.

He noted with sadness that many of the large corporate laboratories had been closed in the meantime, “as companies had shifted their interest towards the short term”. Even the research centres of large universities had often been victimized by the omnipresent desire for targeted research and short-term gains, under pressure of the government and the corporate principals of such research. Budgets for fundamental research have been cut on behalf of targeted research.

Feringa argued that fundamental research pays off, even if the results of such research seem to be disappointing or even totally useless in the short term. 
According to him the latter does not mean that it is wasted money, as intermediate results may give imput to new and more successful research or to new applications of used techniques and methods.

In Davos, Feringa stated that almost everything in for instance nowadays’ iPhones had been invented in such research laboratories during the Fourties, Fifties and Sixties of last century: LCD screens, transistors and many other electronic components that are now part of numerous high-tech electronic devices. 

What companies have forgotten, according to Feringa, is that it sometimes takes more than half a century to turn the fruits of fundamental research into viable products that can be brought to the market.

It is 2018 now: when we apply Feringa’s logic to the present day, it means that the fundamental research and the inventions being done today would create the solutions and commercial products of 2050 and much, much later.

The fact that such fundamental research is NOT performed anymore these days (i.e. to a much lesser degree than in the Fifties – Eighties of the last century), could mean that the large companies will probably run on empty in the end. 

They simply miss the fundamental research, innovative solutions and inventions that they all require in order to develop new, groundbreaking products in the future. You could call this the ultimate form of Pennywise, Poundfoolish: taking a rain check on the future by saving money today. 

And so, as a matter of fact, we are all living in the Age of Pennywise, Poundfoolish. Of course, you could argue that Elon Musk of Tesla has fired a Tesla car into outer space, using one of his own innovative rockets  the Falcon Heavy rocket – as a proof of his own innovative force.  

Isn’t that exciting?!

But please explain me then how much Musk’s rocket technology differs from the groundbreaking Saturn 5 Rocket that Freiherr Wernher von Braun developed and built in the Fifties and Sixties of last century. I think you will know the answer. 

The only great difference between the Saturn and Musk’s Falcon Heavy rocket is the fact that parts of the latter could land on earth again, thus reducing the costs of a launch considerably. However, when this is the only technological breakthrough in fifty years of rocket science since the Apollo launches, than it is quite disappointing, isn’t it?!

And it is the same with the self-driving car. The (computer and telematica) technology behind it is both innovative and exciting, but the majority of the foundations for it has been invented in the sixties and seventies of the previous century.

This proves that good inventions go a long way, but also take a long time to turn into something profitable. When the fundamental research – leading to such inventions – is not performed anymore, the innovation might stop eventually. 

And to make things worse: virtually the only companies that ARE heavily investing in (fundamental) research are information-driven companies, like Amazon, Facebook, Uber, AirBnB, Google and Apple. Companies that mainly sell and exploit information and customer data, but hardly sell tangible products (i.e. except for Apple of course). 

The research of these companies is probably mainly aimed at slicing up the human mind in order to see what makes us all tick. The results of this research will make people more sensitive for the products and services of these companies, as well as for the targeted adverts of (now) Facebook and Google. I dare to state that such research will make us all more addicted to usage of information technology and social media in general; something that does not make us more happy per sé.

In other words: this is not the group of companies that would take us to the stars in another galaxy; rather the contrary, I would say!

The disappearance of the large laboratories is a symptom of a much bigger problem in the Age of Pennywise, Poundfoolish. Another important symptom is the slow, but definitive disappearance of the large conglomerates like Philips, Sony, Siemens and General Electric.

Even though the companies and their names remain on the market (mostly), they have often changed beyond recognization. Many of their former subsidiaries and divisions have been sold or turned into independent companies, under pressure of modern executive managers and aggressive shareholders.

In case of Philips, the Dutch multinational electronics company, this has happened to for instant the divisions Lighting (now Philips Lighting which has an independent quotation and is cut loose from the mother company), semiconductors (now NXP), lithographic semiconductor technology (split into ASML and ASMI) and televisions/flat screens (sold to the Chinese TP Vision).

This de facto split up of the former Dutch ACME company Philips is very much regretted by former CEO Jan “Hurricane Gilbert” Timmer. 

Timmer was responsible for the largest rescue operation in the history of Philips, in which 45,000 people lost their job, but his efforts kept the company afloat and made it turn back to prosperity. 

Due to his past, Jan Timmer is an unsuspected, but nevertheless influential advocate of the large conglomerates that Philips once was and a very important one.

In spite of his high age of 86 years, Hurricane Gilbert still has a sharp vision on the current multinational companies that are much more monolithic than their peers in the last century, as the following snippets of an interview of Jan Timmer with Het Financieele Dagblad prove:  

The most important reason for Timmer to write his book discloses itself at the end of it. There he starts a ‘personal quest’ to find the causes for the massive shrinkage of the multinational. From a conglomerate that is active in the production of telephones, computers, lighting, semiconductors and chip machines, Philips turned into a producer of medical equipment alone. Especially the executive move to abandon the origin of the company – the Light division – was the reason for Timmer to express his thoughts on paper.

“In Africa I saw how large South-African companies were organized. They were set up as conglomerates, in which the separate parts had a quotation at the stock exchange. The mother company kept the majority of the shares, but the subsidiaries had an independent management team and an own Profits & Losses account. Such a set up had been my ultimate goal for Philips, instead of the large firesale that took place during the last decades.”

“Should Philips have kept a majority share in Lighting?”

“Yeah. With Philips as majority shareholder, Lighting would have been better protected. Otherwise it becomes a bitesize chunk. That is the biggest drawback and risk of mono companies [i.e. companies with one single range of products – EL]. You can’t warrant continuity with that.

After I left the mindset took a wrong turn. At the beginning of this century the company came in the grasp of American ‘corporate fashions’ like focus and share buybacks. After the sale of Polygram Philips was financially healthy again and thus the company should have made plans for the future. 

We sold Semiconductors in 2006. But then what?! We should have made a blueprint for what to do with the money. Unfortunately, I don’t have the idea that there was a plan. All that focussing that Philips did only makes a company vulnerable.”.

I agree so much with what Jan Timmer stated in that interview. Roughly three years ago, I expressed similar doubts in Philips’ current strategy in one of my articles:

Philips was an opaque company with an opaque geographical structure, opaque profit centres, an opaque production and marketing structure, opaque cash flows and opaque profits. There were just simply too many products, too many plants, too many departments, too many geographical profit centres and too many management layers and managers, leading to numerous ‘islands in the stream’ doing their own things, irrespective of what the executive management wanted.

But yet, it always seemed to work after all…

That is, until the company fell in the hands of a series of managers with less passion for engineering than for shareholder value, short-term economics and commercial management.

After a few extremely expensive inventions and developments went awry, because they were ill-thought through, poorly marketed, superfluous or simply too far ahead of their time, the subsequent CEO’s have torn the company slowly, but surely apart.

Factory after factory in The Netherlands and other Western European countries has been shut down, while the production moved to the Eastern European and Asian low wage countries. The head-office left its century-old roots in the city of its founders Eindhoven, in exchange for a new establishment in the more ‘mondain’ Amsterdam, which was close to international airport Schiphol.

And the number of subsidiaries, production lines and business units of Philips that were either merged with other companies through joint ventures, have been turned into independent companies or have been sold to other companies, has been long and growing: ASML, NXP, Polygram, Whirlpool, UPC and LG Philips LCD to name only a few.

After yet another strategic turnaround in the past decade, that should change the company into a leading developer of healthcare equipment, the company existed only of three main divisions: Consumer Lifestyle, Healthcare and Lighting. And since last year, Philips Lighting is also tagged with a “For Sale” sign.

This was definitely a shock for the avid endorsers of Philips, as Lighting was the oldest branch of the company. On top of that, during the last, very turbulent decades it has often been the last straw for the company to clutch at, when all else failed. The lighting branch has traditionally been a very stable cash cow over the years and Philips did more than its share of inventions, on their way towards effective and extremely energy-efficient lighting solutions.

The only thing that we all can do is hoping that the classic conglomerate companies, that have been responsible for so many inventions and so many cool products, can wrestle themselves loose from these disturbing trends of 'focusing' and  ‘shareholder value’, in order to get away from the Age of Pennywise, Poundfoolish.

There should be a future for innovative conglomerates that think about their long-term interests, their personnel and their customers, rather than thinking about the immediate needs of their shareholders alone.

And there should be a future too for the large physical and chemical laboratories that brought the world so many scientific breakthroughs and cool inventions. 

The human race is now more than ever dependent on that, in the age of climate change and global heating, leading to worse global droughts and higher sea levels than ever.

Sunday, 11 February 2018

Two researchers state: “Flex contracts are hampering consumption in The Netherlands”. Subdued development of collective wages might cause the lackluster domestic consumption

It is one of the recurring themes of this blog: the subdued wage development in The Netherlands and the effects that it has on domestic consumption.

It is no secret that the lower and middle classes hardly had any wage increases during the last ten year. It is also no secret that many of the store chains aimed at the middle classes in The Netherlands are going through a hard time and that the most successful store chains are either situated at the bottom or the top of the market. This is the effect of the lackluster consumption in The Netherlands.

What most people already suspect has now been proven by two investigators of the Dutch National Bank (DNB). In an article in Het Financieele Dagblad, Johan Verbruggen and Peter Keus stated that there is a strong correlation between the subdued wage development and the hampering Dutch consumption. 

More important, however, is that they also proved that the influence of flexible labour on this subdued wage development is considerable. The pressure of the flexible labour force and also the influx of foreign workers on the wages and rates of normal, contracted workers makes that their wages hardly rose during the last ten years. This is the reason that The Netherlands falls behind in economic development, in spite of impressive export figures.

Here are the pertinent snippets of this article:

The large number of flexible labour contracts in The Netherlands pushes the wages down and hampers the consumptive spendings and prosperity in The Netherlands. This conclusion can be drawn from a blog of two researchers of the Dutch National Bank on the website of economic magazine ESB.

Johan Verbruggen and Peter Keus investigated how the Dutch economy performed during the period of 2002 to 2017, in comparison with seven other Western economies: Germany, Denmark, the UK, the US, France, Canada and Finland. The Netherlands is a moderate performer, according to Verbruggen and Keus.

In order to explain the disappointing growth results, both researchers looked at the composition of the growth. There The Netherlands displays a blatantly different pattern than the other countries. In the period under research the Dutch entrepreneurs were successful in the export of goods and services to foreign markets. Only Germany did better and the US did about as good as The Netherlands.

That The Netherlands is nevertheless only moderate in growth and not belongs to the leading countries in this respect is caused by the strongly subdued private consumption. This consumption per capita in fact stagnated since 2002, while the other countries experienced a growth ranging from 10% to 25%.  

One of the explanations for this phenomenon lies in the share of the national income that flows to the wages. This so-called labour income quote (i.e. AIQ in Dutch) is under firm pressure in the whole industrialized world. 

Much of the growth is transfered to the suppliers of capital, in the form of interest and profit, and so only a lesser part is transfered to the workers as wages. This labour share within the Gross Domestic Product has stabilized at best in the countries under investigation. In especially the US and The Netherlands the share of labour in the GDP dropped considerably.

In The Netherlands, the emergence of flexible labour is one of the causes. Verbruggen en Keus write: “The excessive flexibilization of the labour market in The Netherlands puts downward pressure on the labour income quote”. More flex labour made it possible for employers to pay lower wages to their workforce. This came at the expense of consumption and hence of economic growth and prosperity in The Netherlands.

There you have it. Wage restraint, under pressure of a flexibilized labour force, as well as the influx of workers from the low wage countries (i.e. India and Eastern Europe), has had a direct influence on consumption and prosperity in The Netherlands. For the regular readers of this blog, this conclusion can hardly come as a surprise.

The problem of wage restraint is that it is a fyke, as a matter of fact: once companies start with it on a broad (i.e. national) scale, it will inevitably have a substantial influence on the wage development and consumption in a country. As a consequence of this, it is almost impossible to stop with wage restraint.

This is caused by the fact that:
  • wage restraints lead to lower income among lower and middle classes;
  • lower income leads to lower consumption;
  • lower consumption leads to lower earnings and profits among especially small and medium enterprises and store chains aimed at these middle classes;
  • and finally, lower profits and earnings among SME companies lead to the need to continue wage restraint in order to not land into the red figures.

It is the perfect fyke! In fact, the only ones who can change it are the large (multinational) companies, the government and the large capital suppliers, by simply raising the wages whenever they have the possibility to do so.

Unfortunately, in The Netherlands the government did in fact the contrary. They did so by hardly raising wages for their fixed workers, by making much more usage of flexible labour within their labour force and finally, by substantially raising all kinds of taxes and levies, thus making life more expensive for the Dutch lower and middle classes. 

One could therefore justifiably state that the government is directly responsible for the subdued consumption in The Netherlands.

I made a chart, based upon the correlation between the consumption in The Netherlands and the collective wage development among private companies, subsidized institutions and the government. This correlation is already stunning, even when the chart is also including consumption of food and necessary supplies, that are less prone to positive or negative change (i.e. people still have to eat and buy for instance toilet paper).

Household consumption and collective wage development
in The Netherlands
Chart by Ernst's Economy
Data courtesy of
Click to enlarge
If these necessary articles would have been left out of the equasion, the image would be even more conspicuous when it comes to the stagnation of private consumption.

In the chart I “dramatized” the indexed changes by setting the Y-axis values between 94 and 120 (i.e. 2010: 100). However, the change of the income for all three groups (government, subsidized institutions and private companies) never exceeded 11% growth since 2010. And this wage increase is excluding inflation, which has eaten a considerable chunk from this 11% wage increase!

Looking at this particular image, t isn’t so strange that the development of private consumption in The Netherlands is so lackluster and that normal store chains for the lower middle classes are doing so poorly in general.

The big picture of all this is that especially capital investors and executive remuneration have profited excessively from the economic growth and the successful export of the last eight years, while the common workers footed the bill for it, by keeping the Dutch export prices lower than they should be in reality. 

This is wonderful for export, but killing for domestic consumption.

In spite of numerous statements by Dutch National Bank representatives (even chairman Klaas Knot made such a plea) and various professors in Economy to end this utterly damaging practice of wage restraint, the Dutch government and large employers have turned a blind eye towards the serious drawbacks of it.

The government and the large employers are not willing to raise the wage by 5% per year for the next few years, while the small and medium enterprises cannot raise the wages of their personnel, as their budget does not allow them. 

And so the lackluster domestic consumption will remain lackluster in the following years to come. And that’s a shame!

Saturday, 10 February 2018

Rabobank now understands once more that “playing international bank successfully” is not without risks. Pt II, the judge strikes back!

Almost one year ago, I wrote an article upon Rabobank RNA, the Californian branche of the Dutch cooperative bank Rabobank and the fact that it had been involved in a criminal investigation for acts perpetrated via its branches in Calexico and Tecate. Rabobank, a globally operating bank, is the second biggest bank in The Netherlands based upon the size of its balance sheet.

Rabobank RNA was investigated by the Californian OCC (i.e. Department of the Treasury’s Office of the Comptroller of the Currency) on the allegation of being heavily involved in money laundering via its branches in Calexico and Tecate. 

These branches – both very close to the Mexican border – were receiving so much cash money out of Mexico that they were forced to bring in several money trucks per week to ship this stockpile off. This money was probably coming from drugs trafficking and felonious money laundering, perpretrated by the drugs gangs over the Mexican border.

In that article I suspected that this Californian case would just be as harmful – or even more – as the earlier Libor fraud, for which Rabobank was found guilty earlier:

When these allegations are true, this is a serious situation for this Dutch bank that traditionally prides itself in doing business cleanly, transparently and responsibly. And it seems that the allegations came with a stockpile of circumstantial evidence, as it isn’t normal that a normal bank in the agricultural industry has to deal with (litterally) truckloads of cash money from suspicious sources coming in every week. On top of that the executives are seemingly hampering the investigation into the origin of this money.

As far as I know, the investigation did not lead to a court case yet. This makes sense, as such financial/administrative probes are always notoriously time consuming in the preparation phase, before they can even come to trial. And the more evidence is lying around to be collected and investigated, the more time it takes to inventorise it. This does not mean, however, that it will never come to a trial or a verdict in this case. Especially not as the American financial authorities are always extremely vigilant against foreign bank organizations.

I was right about this trial.

Last week the Dutch bank pleaded guilty to a felony conspiracy charge and was convicted to payment of a penalty to the tune of $368 million.

And even though the penalty itself for this Californian conspiracy was not as high as the huge €774 million penalty for “Liborgate”, it was especially the text of the Californian court’s press release that is so devastating for the cooperative bank for farmers and agricultural companies “that wants to grow a better world together”, according to its boasting adverts and commercials.

Here are the pertinent snippets of this press release:

Rabobank National Association (Rabobank), a Roseville, California subsidiary of the Netherlands-based Coöperatieve Rabobank U.A., appeared today before U.S. Magistrate Judge Jill L. Burkhardt and pleaded guilty to a felony conspiracy charge for impairing, impeding and obstructing its primary regulator, the Department of the Treasury’s Office of the Comptroller of the Currency (the OCC) by concealing deficiencies in its anti-money laundering (AML) program and for obstructing the OCC’s examination of Rabobank.  Rabobank will forfeit $368,701,259 as a result of allowing illicit funds to be processed through the bank without adequate Bank Secrecy Act (BSA) or AML review.

At today’s hearing, Rabobank pleaded guilty to conspiracy to defraud the United States and to corruptly obstruct an examination of a financial institution. In pleading guilty, Rabobank admitted to conspiring with several former executives to defraud the United States by unlawfully impeding the OCC’s ability to regulate the bank, and to obstruct an examination by the OCC of its operations throughout California, including its Calexico and Tecate bank branches.

“When Rabobank learned that substantial numbers of its customers’ transactions were indicative of international narcotics trafficking, organized crime, and money laundering activities, it chose to look the other way and to cover up deficiencies in its anti-money laundering program,” said Acting Assistant Attorney General Cronan. “Worse still, Rabobank took steps to obstruct an examination by its regulator into those same deficiencies.  

“Rabobank had an obligation to shine light on suspected drug traffickers, money launderers and organized crime,” said U.S. Attorney Braverman. “Instead, this bank deliberately allowed hundreds of millions of dollars of suspicious cash transactions and wire transfers to flow through its branches and took measures to hide this activity from regulators.

According to court documents, Rabobank also created and implemented policies and procedures to prevent adequate investigations into these suspicious transactions, customers, and accounts.  Among those policies and procedures was Rabobank’s “Verified List” – a policy that effectively resulted in Rabobank executing an end-run the BSA/AML and SAR requirements.  In particular, Rabobank instructed its employees that if a customer was on the “Verified List,” no further review of that customer’s transactions was necessary -- even if the transactions generated an internal alert, or the customer’s activity had changed dramatically from when it was “verified.”  

Rabobank knew that millions of dollars in cash deposits at these branches were likely tied to illicit conduct.  In particular, the Calexico branch, located about two blocks from the U.S.-Mexico border, was the “highest performing” branch in the Imperial Valley region due to the cash deposits from Mexico.  Throughout

When the OCC began conducting its periodic examination of Rabobank in 2012, Rabobank, acting through three of its executives, agreed to, among other things, knowingly obstruct the OCC’s examination.  Rabobank responded to the OCC’s February 2013 initial report of examination with false and misleading information about the state of Rabobank’s BSA/AML program.  Rabobank also made false and misleading statements to the OCC regarding the existence of reports developed by a third-party consultant, which detailed the deficiencies and resulting ineffectiveness of Rabobank’s BSA/AML program.

To further conceal the inadequate nature of its BSA/AML program and to avoid “others contradicting our findings” and statements to the OCC, Rabobank demoted or terminated two RNA employees who were raising questions about the adequacy of Rabobank’s BSA/AML program.

This Californian press release leaves little to be desired, when it comes to exposing the erratic and condemnable behaviour of the Rabobank in this matter. Especially when you let the red and bold texts sink in, you understand how outrageous the facts were that played in California and how conspicuously the Rabobank RNA acted to hide these facts from the American authorities. Especially the fact that Rabobank RNA fired two employees, who thought to do the right thing, sheds a very unfavourable light on the bank; not only on the Californian Rabobank RNA, but on the Rabobank Group as a whole.

Rabobank RNA, as a full subsidiary of Utrecht, The Netherlands-based Rabobank International (in those days), was not operating in a vacuum in California. Either it was or it should have been under close scrutiny of both Rabobank and Rabobank International, the two headoffices of the global Rabobank organization in Utrecht, The Netherlands.   

This means that both the head offices either have been or should have been aware that those branches in Calexico and Tecate created traffic jams of their own with money trucks, filled to the brim with Mexican drugs cash. 

Personally, I would be very surprised when the Dutch offices would NOT have been aware of these events. Even if the Dutch accountants and controllers just would “go through the motions” in their continuous assessments of the Californian bank data, some events must have been too conspicuous! And I am very sure that these accountants and controllers did not just go through the motions!

There would have been simply too many cash transactions around the thresholds for money-laundering reporting and too many truckloads of cash on behalf of those two Californian branches close to Mexico to NOT be conspicuous for those accountants.

This trial and especially the judge’s brutal verdict is something that Rabobank should take into consideration very much. Otherwise the bank could become an organization of ill-repute, with a sanctimonious charisma coming from their bragging commercials and their carefully preserved cooperative farming image, but with actual conduct that is well below par. 

Perhaps, Liborgate was just an unfortunate, albeit very expensive incident. And also Calexico might be nothing more than a local fraud and deception case of the Californian branch alone. But in this case it will definitely be “three strikes, your out”. One more incident and the reputation of the Rabobank is gone for a long, long time. Look for instance at Deutsche Bank and its enduring battle against its own ill reputation nowadays.    

And even though the American criminal case against Rabobank is now history with this verdict, the whole impact of these events is far from over yet. A Dutch sollicitor, Göran Sluiter, is planning to start a private court case against Rabobank in The Netherlands, on behalf of Mexican victims of the ruthless drugs mafia at the Mexican-American border.

On top of that, I have personal contact with an American customer of Rabobank, who wants to start a legal battle against the bank, based upon the fact that Rabobank hid their “criminal behaviour” from their American customers, thus making a better than deserved impression on their investors and private and corporate lenders. Probably this customer is not the only one, who wants to start a court case against the bank.

As far as I’m concerned, there is only one thing that the Rabobank could and should do. Not continuing with their boasting commercials and their ‘holier than thou’ charisma, without admitting to the general public how terribly wrong they have been a few years ago.

No, they have to sincerely apologize for these reprehensible events and prove that they are worthy of the confidence of their millions of customers in The Netherlands and far, far outside. This confidence won’t come for free and once lost, it will be gone for a long time.

Sunday, 4 February 2018

We must make an end to the pharmaceutical cash cows! When the prices of lifesaving drugs smell like extortion, the government and national health insurance system must say ‘No’ to compensation

It is perhaps the curse of the 21st Century: as a consequence of deeper insight in the human body, better therapeutical techniques and more advanced medicine, it is now possible to cure or slow down diseases that had been a death sentence for their victims until the recent past.

Many formerly deadly forms of cancer, auto-immune diseases (“aids”) or muscle degradation diseases can be cured or slowed down to chronical diseases today. Other diseases in these categories are still deadly eventually, but life can be prolonged with a number of years and/or the sickness runs with less debilitating effects on the patient.

The price to pay for such advanced medicine is often high, as developing these special drugs is mostly very expensive and the market for some of these drugs is small – even on a global scale. The compensation is therefore much higher than in case of more common, non-patented description drugs. This is not more than logic and should normally not be a reason to not compensate such drugs for chronical or deadly diseases; especially when the curative effects are irrefutable and have a lasting effect on the health and stability of the patient.

However, during the last decade the stories kept on emerging about excrescenses within the pharmaceutical industry: about pharmaceutical giants raising the sales price of certain drugs with dozens or hundreds of percents. 

For instance after a takeover of their initial manufacturer or just because they could do so, as their patients would need their drugs anyway.

Or about life-prolonging drugs that cost patients (or their health insurance companies) more than a quarter million dollars in annual compensations nowadays, but can be produced for a fraction of the price by proficient pharmacists and medical universities.

The same ol’, already worn-out story from the pharmaceutical companies is always that research costs millions of dollars. Such specialty drugs must therefore have these high prices in order to keep the pharma companies afloat and compensate for future research. And in some cases this story will definitely be true.

However, the pharma industry is also an industry that enjoys excess profits of sometimes more than 30 per cent per year; an industry in which the sky seems the limit in some cases. On top of that, ‘Big Pharma’ traditionally threw millions and millions of euros towards doctors and pharmacists, via sponsored courses and workshops in luxurious resorts at tropical destinations. By doing so, Big Pharma bought their eternal love and loyalty, leading to numerous descriptions of expensive patented drugs, where cheaper alternatives would also have sufficed.

Also the pharma industry still unleashes massive lobby power towards parliaments all over Europe, thus securing a willing ear among the national and European members of parliament. Such lobbies are invisible to the general public, but they are extremely successful in protecting the interests of Big Pharma.

And last, but not least: as the prices of such ‘Champions League’ drugs as the aforementioned ones differ between countries and price-setting is an extremely opaque process, the MP’s all over Europe are 5 – 0 behind against the ‘cunning’ pharmaceutical companies when it comes to information equality.

At the same time the world witnesses that strategically important drugs like new antibiotics – necessary to fight broad drug resistance among deadly bacteria – or drugs against for instance malaria  are developed at such a lackluster pace and by that little pharmaceutical companies, that it seems like an endless journey without any form of urgency.

This all paints an image of a pharmaceutical industry that merely exists for itself alone and not for the benefit of the world as a whole: only for the remuneration of their executive management and for the sheer profits of their shareholders. Not for the patients worldwide they are supposed to cure and that are dependent on them in order to survive.

The latest episode in this continuing story is the compensation for the drug Spinraza in the Netherlands. This drug against a debilitating and deadly muscle disease (spinal muscular atrophy) has the dubious honour of being the most expensive drug available in The Netherlands, with annual expenses of over half a million euro per patient. The Dutch Telegraaf wrote the following snippets about it:

That there will be green light for this drug [Spinraza – EL] is far from certain yet. From recent calculations of the Dutch Healthcare Institute (i.e. Zorginstituut Nederland) it becomes clear that the drug is unprecedently expensive: the drug costs more than half a million euros per year in the first year and over a quarter of a million in the years thereafter.

When the drug is allowed into the ‘basic compensation package’ of the Dutch national health insurance, Spinraza will eat away €30 million per year of the national health budget. This kind of drug is increasingly thrusting the healthcare premiums up in The Netherlands. In more and more [Dutch] households these premiums are pressing hard on the monthly budget.

This is almost an impossible choice for national politics:

Allowing this (and other) ‘Champions League’ drug(s) into the Dutch basic compensation package means that literally hundreds of millions of euros per annum in healthcare budget go up in thin air on behalf of a very limited, but nevertheless growing group of patients. And this development could continue until the point that the whole national healthcare system becomes unaffordable for the Dutch government and the “average Joe in the street”.

Not allowing this particular medicine or other Champions League drugs to the basic compensation package of Dutch healthcare, however, means in fact a death sentence for the patients suffering from such fatal diseases. They have nowhere to go anymore, as the road to such specialty drugs remains closed then. In other words: the Dutch government here is caught between a rock and a hard place and can never do it right.

Then the simple, one million dollar question remains: where ends a fair compensation for expensive, but lifesaving drugs being created for extremely small groups of patients and where starts (inter)national extortion of governments and insurance companies, using their terminally ill and desperate patients as leverage?!

This is really anybody’s call and it is a nearly impossible choice to make, but someone should do it!

With (of course) an ambiguous feeling about it, I therefore found it good news that the Dutch Healthcare Institute drew a provisional red line with respect to compensation of the aforementioned Spinraza. For the simple reason that the drug is currently too expensive for the Dutch healthcare system to bear.

The NRC wrote an article about this conundrum, of which I quote a few snippets:

For patients that suffer from muscle disease SMA the medicine Spinraza should be added to the basic compensation package for healthcare. Condition is, however, that the price is reduced considerably. In its judgement, the advisory committee for the Healthcare Institute weighs in appraisals by patients and attending physicians about the effectiveness of the drug.

The committee spoke with manufacturer Biogen and asked for an explanation with respect to the price. Spinraza costs roughly half a million euros per patient per year. The Healthcare Institute called this price outrageously high: ”The manufacturer could not explain sufficiently which expenses are made for the production of this drug”, according to a spokesperson of the Healthcare Institute in a notification upon the advice. The price reduction, that is conditional for addition of Spinraza to the basic compensation package,  must be drastical: 80 to 85%.

At this moment the patients of this terrible disease SMA do receive their Spinraza, based upon a temporary arrangement that lasts until May, 2018. And the advice of the Healthcare Institute is not yet definitive until February 5.

However, when the Healthcare Institute sticks with its provisional decision, the minister will have to renegotiate with Biogen for a fairer price. And when these negotiations fail, the drug will not be compensated anymore, as of May.

I truly hope that the Healthcare Institute and Minister Bruno Bruins of Healthcare and Sports mean business against Biogen. I consider that to be the only way to stop the outrageous development of prices for modern drugs, meant for a limited number of patients.

We all must make an end to the pharmaceutical cash cows, in order to stop the extortion of modern society! When the Dutch government gives in in this case, it will spur other pharmaceutical companies to also raise their prices for their Champions League drugs. And then the healthcare system everywhere could become unaffordable eventually.

The pharmaceutical companies should really ask themselves for which they are established: for giving their executives and shareholders the ‘financial ride of a lifetime’? Or for helping patients worldwide to cure from deadly or debilitating diseases against a fair compensation?

That is their billion dollar question. And it should be answered fast, before governments all over the world consider to step in and nationalize indispensable pharmaceutical companies!