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  • EV on SB2020

    EVs, aka Electric Vehicles, were the big winners of the
    Super Bowl 2020. Everybody had an electric car for the occasion. Audi and even
    a new EV version of the gas-guzzling Hummer.
    Imagine the king of EVs, Tesla,
    jumping $130 per share on Super Monday! TSLA popped 20% up to almost $800 per
    share, nearing a $150B market cap firmly – 3 times the value of GM. Then on
    Super Tuesday, Tesla jumps another $100 to reach over $900 (to $164B market
    cap). Arguably, there are a few extra factors making Tesla’s stock pop: an
    upgrade and short squeeze. Maybe a little overpriced?
    Tesla has a market share of about
    1.5%, so… it does have room to run. But only if you believe that we have
    reached an inflection point where a shift to most or all cars will be electric.
    Fortunately, the charging stations are now pretty will established.
    But, the average age of cars on
    the road today are 11 years old. Even if we move to 50% EV in 10 years, it will
    take decades for half of the cars on the road to be electric. Longer, of course,
    for trucks because they are just now starting to ship.
    Still, the trend toward EVs is
    definitive. Everyone has a few. Some auto manufactures are no longer
    introducing new gas or diesel models.
    You would think that the drop of
    oil prices (down to $50 for WTI) this week on the corona virus scare might be a
    boost to gas models?
    Related to market cap, remember
    that Tesla bought sister company Solar City so it does solar systems and
    battery banks (PowerWall). Tesla GigaFactories crank out batteries (with
    partner Panasonic). With the cost of batteries dropping, both EV and storage
    become more and more affordable. The big thing to look for in battery
    technology is the move to safer and/or more powerful technology. Big break
    throughs in battery tech – cheaper, better, lighter – will be game changing.
    Tesla stands to win in every case, old lithium or new whatever.
    I could not bring myself to buy
    Tesla stock at $200 in June; over $900 is nose-bleed levels today. But, it does
    suggest a momentum shift to EVs in our future.

  • Opportunity Lost by Waiting until 2020 for Solar Investment

    [UPDATE: 30% Investment Tax Credit on renewables in the
    IRA Act 2022. See our Blog post here. This makes all the financial discussions
    below much more profitable. Also, higher inflation and higher power inflation.]

    The Renewable Investment Tax Credit, which is currently in
    2019 at 30% of the qualifying investment, is a wonderful incentive to put in
    renewable power including solar, wind and qualifying battery backup. The ITC
    will drop down by 4% in 2020 and then again by 4% in 2021. After 2021, the ITC
    drops off a cliff, to 10% for businesses and zero (0%) for residential. Here is
    the stepdown in Solar Investment Tax Credit (ITC): https://seia.org/initiatives/solar-investment-tax-credit-itc





















    You can still get your foot in the door on the tax credits
    in December. The “Safe Harbor” on ITC pertains to launching the investment in
    the current year and locking in that higher level of tax credit. The safe
    harbor allows businesses to take advantage of the current ITC rate even though
    they didn’t allow enough time to fully install this year. Generally, figure 5%
    or more down payment in the current year and continuous progress toward the
    finished project. One reason for the safe harbor, in general, is that someone
    might want to launch in 2020, but there is such an end-of-year demand for solar
    panels that it is not possible to get them before January 1st.
    Winter storms, trade storms, government permits during holidays, etc., might
    delay the full installation before the year ends.
    Safe Harbor requires continuous progress on the solar project,
    and there is a fixed deadline when the system must be completed to maintain the
    qualification for the higher tax credit. Here are some details on when the
    investment must start, and finalize, in order to be eligible for the higher
    ITC: https://www.foley.com/en/insights/publications/2019/09/solar-renewable-energy-investment-tax-credits

    Solar Example in December of 2019

    So let’s work an example for a business that has a $100,000
    solar investment in consideration in 2019. (See the table below.)
    First there’s the $30k tax credit that reduces the business tax
    liabilities, dollar for dollar. This is money that you simply do not pay out to
    the IRS. Then there’s the possibility of 100% depreciation of an asset in the
    first year, so the tax shield is based on the reduction in net income based on
    depreciation. (The tax shield is equal to the tax rate times the amount of
    depreciation; the asset basis is reduced by half of the ITC, or 33% of $85k in
    this example.) Therefore, the actual investment is only about 42% of the solar
    system costs, once all the tax benefits of the investment are considered. If
    the savings are $7,200 yearly (assuming no increases in power costs), then
    there’s a 17% return on investment each year. Simple payback is less than 6
    years!



    That is crazy profitable for a long-term investment. It is especially
    profitable when considering that the business is already committing to paying
    for power indefinitely from the power company. So, taking a loan of say 15
    years could result in loan payments that are lower than the payments for power,
    especially when considering that the power company raises rates (you should
    figure at least the rate of CPI inflation). At 2% power inflation, the net
    present value (NPV) of the investment jumps to $108k from about $75k (30 years
    at 4.5% loan rate).
    So the investment is profitable. Very profitable. But what
    if you want to do the investment next year? What is the cost of waiting? I’m
    glad you asked!
    With the safe harbor on Solar ITC you can lock in the ITC
    savings this year. You will need to put 5% down in 2019 and starting progress
    on the system. Here’s what your cashflow would look like for 2019: $30k ITC
    savings in taxes less the $5k deposit on the solar system. That’s a positive
    $25k cash flow this year.



    Since the investment tax credit drops by 4% (to 26% in 2020)
    the lost ITC is $4,000 if you buy the solar system and take the tax credit in
    2020. The $4,000 opportunity loss, compared to the $5,000 deposit in 2019 is only
    $1,000 difference. If you plan to do the solar system anyway, then the costs of delay are relatively large, especially when adding a year of power savings. The delay for a year could easily be a loss of $10k or
    more in opportunity lost.

    Solar is a Different Kind of Investment

    There are two major points, however, that make this
    different from most typical investment analyses. (Three, really, if you were to
    discuss the environmental savings, but that’s for another article.) First, the
    money your spending is committed money for power as long as the business is
    open and operating. Taking a loan to buy the solar system might prove to be
    cash positive indefinitely. Take $100,000 loan; pay interest only of $4,500
    (4.5%) for first year or two until you realize the tax benefits of the solar
    ITC and depreciation; apply the tax savings to the loan; and then make payments
    on the loan for 8 years. The loan payments could be about $1,000 less per year
    than what you would have paid in electric bills, especially as the cost of
    power from the utility company increase over time. Once the loan is paid off,
    the price of power that you generate for yourself is pure profit!
    Speaking of profit, here is the second point. Every dollar
    you reduce your power bill is pure profit. Things like smart thermostats, insulation,
    weather stripping, adjusting habits/processes, etc. might result in reducing
    the power bill by 5% to 25% at little or no out-of-pocket costs. That could
    result in a perpetuity of savings. If the firm’s cost of capital is, let’s say 8%,
    then the present value of the perpetuity of savings of $1,200 per year
    ($100/mo) would be $15,000 in present value terms. Plus, being more energy
    efficient means that a smaller system is required when going solar.
    An even more interesting concept related to energy savings
    is looking at the sales volume required to equal the $7,200 savings annually.
    If the firm has a 10% profit margin, the sales to cover the power bill is
    $72,000 per year (once the loan is payed off). In the current loan example,
    cash flows (savings really) are positive every year and go up based on power
    inflation. When the loan is payed off in year 11 you start to realize huge
    savings (profits).
    By the way, someone buying this property would pay more for
    the business because it comes with “free” electricity. A Lawrence-Berkley study
    found that some properties would appreciate by 20 times the annual electric
    savings. Therefore, the property might be worth about $144k more based on 20
    times the $7,200 annual savings. Since the net investment after taxes is about
    $42k, the property could appreciate about $102k over the solar investment.
    That’s a property appreciation of almost 3.5 times the net investment.

    In short, the investment in solar power can be crazy
    profitable. After January, it is not quite so crazy profitable. But, if you are
    planning to go solar in 2020, you need to seriously consider launching the
    project in 2019 and reaping the additional tax savings (and energy) savings.

    About SBP.
    Strategic Business Planning Company has been working on various telework, solar
    and energy efficiency projects. There are several factors that we consider in a
    more comprehensive analysis of a Solar investment that are not represented
    here. We also enjoy doing the planning associated with Intellectual Property
    (Patents) ventures; look for our Perpetual
    Innovation    ™ line of books on patent commercialization.

  • Out of Control Healthcare Costs, Delinkage may help?

    We have a new blog post in IPZine about trying to control healthcare costs by taking a new twist on the linkage in BIG phara to patent protection. Check that out this article on delinkage of intellectual property protection.

    In 2017 we talked about scenarios that jump out at you.

    Scenarios that Jump Out At You
    Scenarios that really stand out, including compounding effects.

    One that always is front-and-center is the out-of-control escalation of healthcare costs in the US, now up to 18% of GDP. In an Nov 20 2019 blog over at IPZine there’s discussion of “delinkage” related to pharma patents that has some potential for taming the out-of-control healthcare costs.  Included in that blog post is a discussion of how long it will take before healthcare costs escalate from 18% of GDP (approx. $3.6T of the $20T GDP) to 50% of GDP, and even 100% of GDP?

    Here is some of the math. You can do your own figures. Assume that Healthcare costs increase by 10% per year as they have for decades (even though that rate is lower currently). Say that GDP growth is 2.5% and inflation is 2% (real GDP growth is =+0.5%). How many years before all healthcare costs in the US reach 25%, 50%, 75% and even 100% of the US GDP!???

    Year Description (+10%) Targe%GDP # of Years
    2025 Years til % of GDP 25% 4.5
    2034 Years til % of GDP 50% 14.1
    2040 Years til % of GDP 75% 19.7
    2044 Years til % of GDP 100% 23.7

    That’s right, with 4 or 5 years, the total healthcare costs of the US could be 25% of GDP. In 14 years it could be 50%, and in 20 years it could represent 75% of GDP. If this doesn’t scare you into taking some actions, then you obviously don’t understand the magnitude of the problem! This was the problem that we faced for decades when Healthcare costs were increasing at 10% or more each year.

    Okay, so healthcare costs are lower now since the Great Recession; let’s say they may have dropped to 5% to 7.5 increase per year (2 to 3 times CPI inflation).

    At 5% healthcare inflation:

    Year Description (+5%) Targe%GDP # of Years
    2033 Years til % of GDP 25% 13.3
    2061 Years til % of GDP 50% 41.4
    2078 Years til % of GDP 75% 57.8
    2089 Years til % of GDP 100% 69.4

    Note that it is no longer 4 or 5 years to reach 25% of US GDP, it takes more like 13 years. It takes 40 years to reach about 50% of GDP.

    When you consider that the US spends 4 times what the rest of the world spends on healthcare (about $10k) and more than twice what the typical developed country spends… For outcomes that are no better… Some place in here we need to rethink.

    Hall and Knab (2012) outlined 10 other items besides healthcare costs that were non-sustainable trends/practices that appeared to have compounding and accelerating forces at play. The (US) Federal deficit is one. Each of those scenarios loom as large or larger today than back in 2012.

    #scenario #healthcare #gdp #compounding #ipzine #patents #intellectualproperty

    References

    Hall, E., & Knab, E.F. (2012, July). Social irresponsibility provides opportunity for the win-win-win of Sustainable Leadership. In C. A. Lentz (Ed.), The Refractive Thinker: Vol. 7. Social responsibility (pp. 197-220). Las Vegas, NV: The Lentz Leadership Institute. (Available from www.RefractiveThinker.com, ISBN: 978-0-9840054-2-0)

  • Delinkage and the Patent System for Pharma: Trouble Ahead?

    While the term “delinkage” has been around since at least 2005, it is not seen or heard very often.  It is the term used in the biomedical field by lawyers and politicians to mean a new way of funding drug R&D such that the patent system could be replaced with the result that a drug monopoly would not exist and drug prices would be significantly lower.  One of the advocates of this is Presidential candidate Bernie Sanders submitted the Medical Innovation Prize Fund as legislation in 2017 that would deny monopoly rights to pharma innovators and create a government fund.

    Delinkage is discussed in a Patent Strategy article Delinkage embraced innational elections as alternative to patents (ManagingIP, C. Kilpatrick, Nov. 14, 2019)  The article notes that in 2017 prescription drug spending was $334B and that US national healthcare spending was 17.9% of GDP.  That’s right, the US GDP, which is now at $20T devotes 18% toward healthcare! That’s approaching $4T when all healthcare from all sources are included! The high price of drugs is a big part of the escalation. Anecdotes and reports abound of grossly high prices for a drug and patients who go without needed medication because they cannot afford it.

    “We cannot control costs, reduce access barriers and protect and enhance innovation unless we change the way we finance biomedical R&D.  Delinkage is a radical and transformative approach to bring policy coherence to objectives regarding access, innovation and cost control.”  (Knowledge, Ecology International, Delinkage.org)

    The fact that this has been floating around since 2005 is proof positive that there is not a lot of momentum behind it.  Fundamental questions abound about how, how to, what if, where would the money to fund multiple projects over multiple years come from?  What if it doesn’t work?  Who pays?  What would the impact on the patent system — defined in the US Constitution — be?  There are international implications for patents so how would delinkage work globally?  What happens to the patent system if biomedical is carved out?  Is this a slippery slope, domino effect?
    At the risk of getting way out in front of our headlights, here is a possible middle road for consideration.  Keep the existing patent system as is or improved, allow the pharma company to obtain funding (much of it comes from the federal government anyway, including FDA, DARPA, Health and Human Services, etc.).  When the drug is approved for a market, the patent(s) is(are) treated like a Standards patents.  That is, it must be licensed to any and all, with a standard royalty rate, with all appropriate terms and conditions.  Multiple providers should result in reduced prices. 
    How do we control costs while protecting innovation? Delinkage might be a possible solution in Pharma.

    Non-Sustainable Healthcare Costs Revisited
    It is important to note the projection that Hall and Knab identified in a 2012 article related to healthcare costs in the US. Healthcare costs in the US had increased from 6% of GDP a few decades ago. Healthcare costs for several decades had increased by about 10% per year. During the Great Recession, this run-away healthcare costs has reduced to 4% or 5% per year, but still double or triple the rate of inflation. Some of the calming of combined healthcare costs can be attributed to many drug patents expiring, to the great recession, and to Obama Care (especially the early years of ACA).
    So, here is the trick question. If health care inflation rises back up to 10% per year, GDP growth is at 2.5% and general inflation is 2%, how many years before combined healthcare costs exceed the US GDP? Obviously, the out-of-control healthcare costs is not sustainable, but this question helps to put it all into focus. Answer: In the described case, it would take less than 24 years before healthcare costs exceeded the US GDP!.  For healthcare to increase to 50% of the US DGP would take only about 14 years.

    This out-of-control costs is horribly unacceptable. It is an unsustainable and compounding problem. Plus, the US spends more on healthcare (pre capita) than any other country, and generally has worse results!

    So, we are back to the question, what can be done here in addressing this problem? Ignoring the problem, and even adding to it, like the federal deficit, has an ugly way of coming back and biting us in the hinny.

    Maybe there’s something to the delinkage approach that can work for (almost) everyone and make a difference in bending the healthcare costs curve?

    Just to be clear, we at IPZine love innovation, we fully respect and believe in Intellectual Property, and we like capitalism – especially in places where it is sustainable and doesn’t create unmaintainable results.

    Delinkage has interesting possibilities.
    Reference
    Hall, E. B., & Knab, E. F. (2012, July). Social irresponsibility provides opportunity for the win-win-win of Sustainable Leadership. In C. A. Lentz (Ed.), The refractive thinker: Vol. 7. Social responsibility (pp. 197-220). Las Vegas, NV: The Refractive Thinker® Press. ISBN: 978-0-9840054-2-0

  • Sustainability at “the Costco”

    Costco wholesale club continues to impress. While many other retailers are struggling to stay alive and relevant, Costco keeps chugging along at a 7% sales growth and an impressive 36 Price/Earnings ratio (32 PE based on foretasted earnings), a PE ratio reserved for rapid growing tech companies not the single digit PE where most retailers find themselves. Investors like this safe, rather counter-cyclical, recession-resistant steady growth company(NASDAQ: COST). Note the huge 4.7 PEG rate (multiple of PE to 5-year growth rate) suggesting an over-priced stock. But the company itself is impressive. At $300 per share and a market cap of $132B Costco continues to push all time highs.

    Costco is also a big proponent of sustainability. In terms of paper and wood products (and the related requirements for their suppliers and Kirkland-branded products). Read about Sustainable forest products in November 2019 Costco Connection. As a wholesaler/retailer, Costco has to work through their supply chain, especially with the Kirkland-branded products. As it pertains to wood/paper/tissue, they are working through the certification organizations for trees, forest, etc.
    “We believe that the best first step is to source these products from
    responsibly managed and certified forests. To achieve this, we employ
    forest management certifications through three leading groups: the
    Forest Stewardship Council (FSC), the Sustainable Forestry Initiative
    (SFI) and the Programme for the Endorsement of Forest Certification
    (PEFC), with a preference for FSC. Products that have these
    certifications have met strict standards to support sustainable forests.”

    Costco continues to push for better, more sustainable products. You don’t have to go to the “organic” section of the store. Because of their buying power, you don’t have to pay the Whole Foods’ prices to get quality, organic foods. Each year, you find more and more shelves with the only options being “organic”, “sustainably sourced”, etc. You can spend less time reading the labels and more time packing your cart to the rafters!

    The consumer has a cost-benefit and consumer-responsibility consideration. Is the special trip to Costco worth the extra time, and is buying a 5-year supply of something — say toilet paper — really the right way to purchase. We often car-pool and share. We don’t need an entire box of printer paper, but dividing the box among 2 or 3 people works great. Kind of leaverage our buying power, while minimizing our footprint.

    One thing that you gotta love about Costco, Starbuck’s and other sustainably minded companies is their open statement about trying to figure it out together: “We do not have all of the answers, are learning as we go and seek continuous improvement.“

    [Costco’s] Sustainability Principles
    • For Costco to thrive, the world needs to thrive. We are committed to doing our part to help.
    • We focus on issues related to our business and to where we can contribute to real, results-driven positive impact.
    • We do not have all of the answers, are learning as we go and seek continuous improvement.
    [Costco’s] Sustainability Responsibilities
    • Take care of our employees.
    • Support the communities where our employees and members live and work.
    • Operate efficiently and in an environmentally responsible manner.
    • Strategically source our merchandise in a sustainable manner.