Big tech skates, biotech exit gets blocked

 Cross-posted from the Bio Business Blog

A novel antitrust strategy by the Biden Administration’s Federal Trade Commission and the EU is seeking to end an acquisition by Illumina that would accelerate the availability of a cell free cancer screening. More seriously, if widely adopted, it would make it much harder for successful startups to exit — and thus for them to raise money and be formed in the first place.

Ironically, the government agencies are seeking to block Illumina from paying $8 billion to buy back  Grail, its own spinoff company. As the WSJ editorial board concluded Friday:

Government Race Against a Cure

In 2016 Illumina formed Grail with the goal of developing a blood test that could detect DNA from cancer cells before people show symptoms. A year later Illumina spun off Grail. This let Grail raise venture capital to finance large clinical trials while Illumina focused on building its other businesses.

Fast forward four years. Grail’s technology can now reliably detect 50 cancers at early stages with a simple blood draw. While the tests aren’t 100% accurate, the false positive rate is less than 1%, which is lower than for mammograms and PSA prostate tests. Grail’s technology can also detect the 12 most deadly cancers with 60% accuracy and has the potential to reduce false cancer diagnoses and invasive screenings while increasing early detection of aggressive cancers.

Grail was considering an IPO last fall to raise $100 million when Illumina made a more attractive offer. Illumina says its regulatory expertise can accelerate the commercialization of Grail’s technology. Biotech startups often struggle to obtain regulatory approval and insurance reimbursements.

The argument is virtually unprecedented: most mergers (since the Teddy Roosevelt days) have been fought based on horizontal combination in restraint of trade, while Illumina is a strategic supplier to Grail (and also supplies to other firms).

What seems particularly disreputable is that the FTC is seeking to kill the merger without allowing a court to rule on the merits of its arguments. Instead, the FTC is hoping to harass and stall the applicants until the Dec. 20 expiration of the agreement.

The reality is that little companies develop new technologies, but can never scale as quickly as a big company. The June 3 editorial suggests that Grail’s competitors are fighting the merger to slow Grail’s rollout and let them capture more market share.

Meanwhile, the EU is asserting authority over a transaction (between US firms) for which they have no jurisdiction because Grail has no operations there. As the WSJ wrote on May 29:

The change in European policy marks an effort by the commission to adapt its antitrust enforcement to a fast-changing marketplace where companies can expand with great speed, including through the acquisition of pivotal smaller businesses, the commission has said. Its March policy guidance changes nothing in the letter of the law but fundamentally changes how it is interpreted.

Potential red flags for merger review now include almost any deal done by a tech giant; almost any deal in a highly innovative sector, such as pharmaceuticals; a deal that might trigger complaints from third parties; and high-price acquisitions of companies with little revenue.

“It raises a lot of questions and uncertainty,” said Salomé Cisnal de Ugarte, a partner at law firm Hogan Lovells in Brussels. “It can affect every transaction.”

Finally, beyond the policy issues are the sheer scope of transactions on the global economy. Illumina is a $3.4 billion/year company, not even on the Fortune 500 (#687). Meanwhile, Amazon ($420b), Google ($182b) and Facebook ($86b) dominate their respective segments — in a way no oil or car company ever did — and continue to stifle competition at every opportunity. A decade from now, which intervention will make the most difference to society and the vibrancy of the economy?

Facebook lies about spying on us

This morning the Wall Street Journal reported yet more evidence of how Facebook has been misleading (and, at times, outright lying) to the public about how much privacy we have when we are the product that they relentlessly sell to advertisers. Zuckerberg et al claim we have controls to protect ourselves from spying by Facebook and Instagram, but the reality is that we do not.

In a story entitled “Why Facebook Still Seems to Spy on You,” reporter Katherine Bindley wrote:

If we take advantage of all these privacy controls, it shouldn’t still feel as if Facebook is spying on us, right? We shouldn’t see so many ads that seem so closely tied to our activity on our phones, on the internet or in real life.

The reality? I took those steps months ago, from turning off location services to opting out of ads on Facebook and its sibling Instagram tied to off-site behavior. I told my iPhone to “limit ad tracking.” Yet I continue to see eerily relevant ads.

I tested my suspicion by downloading the What to Expect pregnancy app. I didn’t so much as share an email address, yet in less than 12 hours, I got a maternity-wear ad in my Instagram feed. I’m not pregnant, nor otherwise in a target market for maternity-wear. When I tried to retrace the pathway, discussing the issue with the app’s publisher, its data partners, the advertiser and Facebook itself—dozens of emails and phone calls—not one would draw a connection between the two events.
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The day after I stepped into a San Francisco clothing boutique called Reformation—and didn’t buy anything—Instagram showed me an ad for that store. I confirmed in iPhone settings that location sharing for Instagram was off.
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I asked Facebook why I was still seeing ads that seemed tied to my browsing history. A spokesman confirmed that the setting only covers data that Facebook itself handles. Facebook can’t guarantee that users won’t see ads influenced by browsing data that comes from a source other than Facebook.…

None of this really explains what happened when I downloaded the What to Expect app and ended up almost immediately being pitched maternity-wear. I’m single, I long ago permanently hid the parenting ad topic and none of my Facebook “interests” relates to children. I don’t get pregnancy ads on Facebook or Instagram.

The What to Expect app was among those The Wall Street Journal found was sharing data with Facebook as recently as November, but the company said it stopped using Facebook’s SDK prior to January.

The Federal Trade Commission his week announced a new task force to monitor anti-competitive activities of “Big Tech,” possibly including breaking up past mergers. Given how Facebook and Instagram data on customers are seamlessly integrated, perhaps the FTC should consider calls to break these two up.

Channelling Bill Shockley

Techstars (an incubator company) and various aerospace companies have announced plans to launch a space incubator in LA. As TechCrunch reported:

Already a major hub for the space and aerospace startup industry, with companies like SpaceX, Relativity Space, Virgin Orbit, Rocket Lab, Phase Four, and others calling Los Angeles home, the new accelerator will provide another booster for LA’s growing startup scene.

The new aerospace program, called the Techstars Starburst Space Accelerator, will be managed by longtime Techstars managing director, Matt Kozlov, who previously helmed Techstars’ efforts at its health-focused accelerator done in partnership with Cedars Sinai.

LA was the country’s major aerospace hub from the 1930s until the end of the Cold War. But with the end of the space race, the downsizing of missile and military aircraft procurement — and the death of Douglas Aircraft and Lockheed’s commercial aircraft division — jobs were cut drastically and others moved to cheaper parts of the country.

The anchor of the new LA space hub is SpaceX, which moved to Hawthorne in 2008. It had been the headquarters of the firm founded by Jack Northrup in 1937, where it built the B-35, F-89 and F-5 military aircraft. (Its B-2 bomber was built at a secret factory in nearby Pico Rivera).

SpaceX is such a tough place to work that it has encouraged its employees to game the Glassdoor employer rating system. Despite this, 1/3 of the 1,109 SpaceX reviews complain about long hours, as with the review that said “There are times I work very long hours including a few times working 60 straight hours”. Last month, SpaceX — celebrating record success in 2018 — rewarded its loyal workforce with a 10% layoff.

Elon Musk has often imagined himself the next Steve Jobs, although Steve Jobs didn’t think so. Musk clearly needs to grow up and at 47 is well past the age when Jobs did so. Jobs was certainly grown up by 1998 (age 43) when his youngest child was born and he took the reins of Apple once again. Jobs also made his money in the commercial marketplace rather than manipulating investors and government procurement.

Instead, I think Musk is the next Bill Shockley. Shockley is known for inventing the field effect and bipolar junction transistors, which won him a share of the Nobel Prize. Late in life, he was known for saying controversial things about political and social issues.

However, (given his Bell Labs colleagues probably would have invented the transistor without him) perhaps his greatest contribution to mankind was creating Silicon Valley. In 1956, he founded Shockley Semiconductor in Mountain View, California.

He was such an asshole as a boss that the next year eight of his leading employees (the “Tratorous Eight”) quit Shockley to form Fairchild Semiconductor — the first of thousands of spinoff companies to be formed in the Bay Area. The eight included Gordon Moore and Robert Noyce — cofounders of Intel — and Eugene Kleiner, cofounder of Kleiner Perkins.

So between his winning personality, stressful working conditions and past/future layoffs, Musk will be making thousands of skilled ex-SpaceX employees available to the LA aerospace labor market. As with Shockley, perhaps Musk’s greatest contribution will be attracting bright engineers to the region, who later take those skills to help get other startup companies off the ground.

Will Elon Musk grow up in time?

On Thursday the SEC sued Elon Musk for tweeting on August 7 that he had financing to take Tesla private at $420/share. It says the number not based on specific conversations with his financiers, but a guess — based on a 20% premium — that was rounded up to a number that is meaningful in stoner culture in hopes of impressing his new 30-year-old girlfriend.

That the claim had serious repercussions is hard to dispute: the shares had dropped to $320 when he abandoned the idea of going private, and closed at $265 Friday, 24 hours after the SEC suit. Musk walked away from a settlement, and now (seems to) assume that his $420 claim is consistent with is vague oral agreement with Saudi financiers — or that juries don’t like to convict celebrities. (Alas, Johnny Cochran is not available for this trial).

By sheer force of will, Musk created three companies in new (or newly disrupted) industries. Unfortunately, none of them have been profitable — Tesla (now parent of SolarCity) continues to lose money, and (the still private) SpaceX still appears to be losing money.

Many have noted that Musk is his own worst enemy (perhaps like our Tweeter-in-Chief). With executives jumping ship at Tesla (WSJ says 50+ at the VP level in past 2 years), he’s driving away the talent he needs to pull the company out of its CFIT. At age 47, it’s long past time for him to grow up.

I’ve never owned or shorted Tesla shares; at the same time, I’ve always been skeptical of Tesla because of its egomaniacal founder who reminded me more of Howard Hughes than Steve Jobs. In response to the SEC, Musk said

Integrity is the most important value in my life and the facts will show I never compromised this in any way.

This is from the man who in 2008 divorced the mother of his five children to marry a 20-something British actress. (She divorced him four years later). Again, he is more like Howard Hughes (with his fondness for starlets) than Steve Jobs, who at his death was attend by his wife of 20 years, the mother of three of his four children.

Some say you can compartmentalize integrity. Some might argue that Donald Trump never reneged on a real estate deal — or Bill Clinton on a political deal. However, no one could claim with a straight face that integrity was either man’s most important value.

The WSJ’s “Heard on the Street” on Friday summarized the veracity-challenged CEO:

There is a fine line between hyperbole and falsehood and Mr. Musk’s ambitious guidance for vehicle production skirted very close to it. To cite just one example, Mr. Musk told investors in May 2016 that he expected Tesla to produce between 100,000 and 200,000 Model 3 sedans in the second half of 2017; Tesla wound up making about 4,000 of the cars that year.

WSJ columnist Holman Jenkins noted

Even with the SEC suing to remove its visionary chief, Tesla is still worth $45 billion in the market. That’s about $204,000 per car it expects to sell in 2018, compared to $4,900 per car for GM and $20,000 per car for BMW, both of which produce cars at a profit.

In other words, Tesla is still valued as if tomorrow’s expected profits won’t be coming from the car business but from some Musk magic yet to be revealed. Blame Mr. Musk’s Wall Street cheerleaders for fostering this illusion, not the SEC if its action this week finally deflates the Musk bubble. 

There is another possible explanation: Musk is not immature or crazy, but desperate. Sometimes, leaders facing long odds realize that everything has to work just right or they will fail. Last night (Friday), my men’s group last night discussed a book on Ernest Shackleton’s third expedition to Antarctica in 1914-1916, when 28 men survived over a year trapped on the polar ice without communication with the outside world.

These sorts of against-the-odds successes usually require both flawless execution and a few lucky breaks. Although they never employed Tom Brady, my former favorite football team had a succession of quarterbacks (Hadl, Fouts, Brees, Rivers) who mount the frantic come-from-behind passing offense; occasionally it even worked.

Musk got a bad break in 2016: the Democrats losing the White House was bad for Tesla and Solar City, even if it might be good for SpaceX. His projected ship dates seem to assume everything will go well, and such assumptions are frequently proven wrong.

 If Musk gets banished, the prospects are grim for his empire, his wealth and his investors. SpaceX has a capable successor in place — president Gwynne Shotwell — but Tesla does not. Unless Musk starts acting like a grown up — and demonstrate a credible succession plan — it will be hard for Tesla to raise money, attract capable talent and management, and keep the stock price up.

So which is the greater longshot: Musk grows up, or he saves Tesla without a personality transplant? Compared to either one, I think LA’s inferior football team has better odds of winning the Super Bowl this season.

Nothing beats a platform monopoly

Since the birth of broadband, net neutrality’s cheerleaders have feared that service providers might begin to act as the internet’s “gatekeepers,” …The real distortions come from massive “platform monopolies” like Google, Facebook and Amazon, whose proprietary algorithms decide what users see online.

The supposed purpose of “net neutrality” is to stop any internet company from getting a leg up over others. But that’s exactly what happens when Google’s search results prioritize its own services—and profits—over competitors’. …If Google’s favoring its own products while pushing potential competitors down its rankings doesn’t create “fast” and “slow” lanes, what on earth does?

Similarly, avowed net-neutrality supporter Amazon was granted a patent in May for “Physical Store Online Shopping Control,” a system to block shoppers in brick-and-mortar stores from using Wi-Fi to view competitors’ prices. Isn’t “no blocking” the heart of net neutrality? Facebook, meanwhile, has virtually abandoned chronology in its News Feed in favor of picking and choosing what users see—and what they don’t—based on what the company has learned about them.

The costs of such abuses from the platform monopolies are obvious and many. Newspapers have nearly been “prioritized” out of existence by Google’s shameless appropriation of their work: Why click through and read a whole article when Google News will pluck out the most important bits and show them to you free—alongside its own ads, of course. … Last year, the FCC chairman tried and failed to force TV companies to make their feeds available on set-top devices made by—wait for it—Google, Apple and Amazon.

The internet giants behind the Day of Action can now track users’ physical location 24 hours a day, learning where they live and work, by logging where their phones are at different times of day or the Wi-Fi networks they pass. If two phones sit side by side overnight, advertisers knows what that means—and appropriately “targeted” pitches are sure to follow.

From Ev Ehrlich, “‘Neutrality’ for Thee, but Not for Google, Facebook and Amazon,” Wall Street Journal, July 21, 2017.