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http://www.wsj.com/articles/from-d rug-prices-to-cl rones-whats-ah ead-for-business-in-2015-14204146 79
BUSINESS
From Drug Prices to Drones, What's
Ahead for Business in 2015
Taking a Look at the Economic and Regulatory Factors Shaping Industry
Jan. 4, 2015 6:38 p.m. ET
ANTHONY FREDA
The old way of doing business is out after a year of big change for many companies. And
2015 promises to deliver more tests and opportunities for established industries andfastgrowing
sectors alike. Part one of two on business in the new year.
Manufacturers Walk Economic Tightrope
For U.S. manufacturers trying to sell their goods abroad, the new year might not be any
easier.
An already enormous U.S. trade deficit in manufactured goods grew even larger in 2014.
For the year's first 10 months, the gap swelled to $606 billion from $540 billion a year
earlier, largely due to weak demand in Europe and in Latin America, two of the main
markets for U.S. goods. Meanwhile, the U.S. imported increasing amounts of
merchandise, from flat-screen televisions to steel pipes, from China.
A stronger dollar made U.S. products more expensive overseas and imports cheaper.
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In 2015, demand for U.S. goods should be slightly stronger from Europe, Japan and
Latin America, predicts Daniel Meckstroth, chief economist at the MAPI Foundation, a
research group. He also expects the U.S. economy to grow at a faster pace than those of
other advanced economies. That growth, and a strong dollar, will pull in imports.
U.S. exports are strong in some areas, including civilian aircraft, such as Boeing Co.
airliners; industrial machinery, especially for semiconductor plants; and turbines and
engines used for such things as natural-gas transmission and electric-power
generation. Weak areas include electrical lighting and steel products.
Imports of products from iron and steel mills in the first 10 months of 2014 surged 41 %
from a year earlier. China and other countries with excess steel capacity flooded the
U.S. market.
Lower gasoline prices are allowing Americans to spend more on other things. To the
extent they buy cars, trucks and food, that will help U.S. manufacturers.
If they buy clothing, electronics, furniture and other household items, most of the
benefit is likely to flow overseas. At the same time, lower petroleum prices are likely to
hurt sales for U.S. makers of oil-exploration equipment.
One good sign: Investment in manufacturing plants is on the rise. Dodge Data &
Analytics estimates that construction started on 65.1 million square feet of
manufacturing space in the first 11 months of 2014, easily outstripping the 52. 9 million
square feet for all of 2013. Much of that construction relates to petrochemical plants
destined to process growing amounts of shale gas.
-James R. Hagerty
IT Empires Prepare to Strike Back
Big information-technology sellers Microsoft Corp., Cisco Systems Inc. and HewlettPackard
Co. were caught flat-footed as new business-technology trends, such as
software sold by subscription and advanced data-analysis tools, started to gain
traction. Now, the behemoths are waking up and trying to claw their way back to
relevance.
In short, the IT Empires strike back.
The tech giants may never regain their lock on corporate technology. But in 2015,
expect them to play offense by embracing young technologies designed to crush them,
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swapping out longtime corporate leaders, forming unlikely alliances, or ditching
moneymaking businesses to reinvest in areas that show more potential for growth.
'We can either lie down on the tracks or get on the train," said Crawford Del Prete,
chief research officer of technology-strategy firm IDC, summarizing the big vendors'
attitude.
Once-unusual events became commonplace in 2014. International Business Machines
Corp. sold its profitable but low-margin computer-server business and joined hands
with consumer powerhouse Apple Inc. in business-mobile apps.
H-P, Cisco and Dell Inc. agreed to sell generic computing equipment controlled by rival
companies' software, undercutting their own pricey hardware. Microsoft pitched its
cash-cow Office software on the iPad.
The fuddy-duddies are bound to pull out more surprises in 2015.
IDC predicts Microsoft or IBM will team up with Facebook Inc. this year to jointly
develop software services for corporations. Microsoft watchers wonder whether the
company will make a landmark business shift by offering Windows as an annual
subscription for the first time. The biggest IT vendors will continue scooping up
startups to stay in the game, executives expect.
Wild cards for 2015: Will companies such as Cisco and EMC Corp. shake up top
management? Will big hardware makers weigh a merger, as EMC and H-P did for a time
in 2014?
What's clear is the Empires can't sit still.
IDC says the big IT vendors' bread-and-butter businesses are shrinking or stagnant,
and predicts one-third of all corporate IT spending this year will be in emerging areas
like mobile, data analysis, cloud computing and digital intelligence. That is up from
about 10% of IT spending a few years ago.
-Shira Ovide
Drug Prices to Get More Expensive
The $1,000-a-day price of a new hepatitis C pill has put more attention on the rising
cost of drugs.
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Yet the hefty price tags of new medicines like Sovaldi from Gilead Sciences Inc.,
weren't the only culprit in higher drug costs last year. Price increases on older
drugs played a big part, too-and the costs are expected to keep soaring.
Brand-name drug prices surged 14% in the 12 months through the end of the third
quarter in 2014, adding $32 billion to drug spending, said Elliot Wilbur, a Needham &
Co. analyst. Up 2.5% were the prices of generic drugs, which are supposed to be an
instrument for cutting drug spending.
"If anything, 2015 list prices will grow more quickly than in 2014," said Richard Evans, a
former drug industry pricing official now an analyst at SSR Health LLC.
Drug companies say they are being unfairly criticized on prices. Medicines account for
only a 10th of overall health-care spending in the U.S., and drug treatments save on
larger expenses like liver transplants, said Robert Zirkelbach, a spokesman for the
industry's trade group, the Pharmaceutical Research and Manufacturers of America.
A big reason for the drug-price inflation, analysts say: Health insurers and pharmacybenefit
managers have lacked the wherewithal to stop it.
Their tools tend to be blunt instruments such as raising copays, which drug companies
have been able to counteract by offering subsidies to many patients.
The payers are trying. Express Scripts Holding Co. , the largest manager of drug
benefits in the U.S., moved in late December to restrict access to Gilead's hepatitis C
drugs after negotiating a discount for a rival regimen from AbbVie Inc. Yet such steps
are possible only when there is competition, which often isn't the case. And in some
previous instances, drug companies still found ways to raise prices, Mr. Evans said.
The payers may gain more leverage eventually, at least for generic drugs. Big drug
distributors and pharmacies-such as AmerisourceBergen Corp., Walgreen Co. and
Alliance Boots GmbH-have been linking up to use their combined drug-buying volume
to press for lower prices.
But it will probably be harder to stop doctors and patients from sticking with brandname
drugs whose prices are boosted, especially if patients are doing well on a
medicine.
The trajectory of Sovaldi in 2014 illustrated the generally favorable pricing climate for
drug companies. Doctors and patients flocked to the cure, making it the best-selling
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launch of a new drug with $8.55 billion in sales during the first nine months of 2014.
Prescriptions for a new Gilead hepatitis C pill, Harvoni, suggest a similarly strong
launch into 2015, though the Express Scripts move will limit some sales. Harvoni's
price tag for a typical patient treated for 12 weeks: $94,500.
-Jonathan D. Rockoff
More CEOs Could Be Headed for the Exit
Chief executives in surprising numbers were shown the exit during 2014-and the
revolving door may not stop there.
At least 14 top bosses of U.S. big businesses got pushed aside or left under pressure-six
in December alone.
In the S&P 500 index, 45 companies replaced their CEOs for any reason during the first
nine months of 2014, reports recruiters Spencer Stuart. At that rate, the number of
companies swapping leaders in all of 2014 would have exceeded the 53 that did so in
2013. (Tallies exclude interim CEOs.)
Among those who left in 2014 were CEOs of Bob Evans Farms Inc., Hertz Global
Holdings Inc., Target Corp. , United Technologies Corp. and Symantec Corp.
The powerful forces of bolder shareholder activists and impatient boards mean "more
CEOs will get ousted in 2015," suggests Jeffrey Cohn, a CEO succession expert.
Activists had success sweeping out several corner-office occupants during 2014.
Darden Restaurants Inc. 's Clarence Otis, longtime chairman and CEO of the restaurant
chain, said in July that he would relinquish the top spot by year-end. The
announcement didn't appease unhappy investors. Starboard Value LP, Darden's
second biggest shareholder, led an October takeover of the entire 12-person board.
Days later, the new board appointed an interim chief and gave the chairmanship to
Starboard chief Jeffrey Smith.
Flawed leadership traits influenced the sudden departures of some CEOs. Juniper
Networks Inc. 's Shaygan Kheradpir left after less than a year at the helm. The
November move followed a review of his leadership and how he handled a customer
negotiation, but he and the board didn't see eye to eye on those matters, the company
said.
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"The swiftness of the forced exit is happening more now," says Michael Useem, a
management professor at University of Pennsylvania's Wharton School. He expects
commanders of companies in slow-growing industries, such as energy, may find they
are especially vulnerable in 2015.
-Joann S. Lublin
Rail Operators' Fixes To Be Tested in 2015
Rail congestion that caused headaches for shippers of everything from corn to coal may
start to ease in 2015 as operators spend more to increase capacity.
The entire transportation industry experienced capacity strains in 2014 as the U.S.
economy continued to recover. Rail was one of the hardest hit areas, with unexpectedly
strong demand and bad weather taking their toll on service.
Severe delays for shipments of corn, soybeans and other crops in the upper Midwest
began in early 2014, with bitterly cold temperatures forcing operators to run shorter,
slower trains even as a record harvests produced more grain needing transport. The
snarls returned after another bumper harvest in the autumn. The coal industry also has
complained of significant delays, particularly in the western U.S.
To fix this, railroads includingBNSF Railway Co., owned by Warren Buffett 's Berkshire
Hathaway Inc., are collectively spending about $2 billion a month in capital
investments, says the American Association of Railroads. The companies hired 17,000
workers last year, some 40% higher than initial projections, and several have
announced significant capital spending and hiring plans for this year.
"As locomotives are added, as crews are added, I think you'll see some of the issues get
better as 2015 progresses," said Mark Levin, a rail analyst with BB&T Capital Markets,
who expects significant improvement by midyear.
A mild winter so far has helped. Additionally, as oil and natural gas prices continue to
tumble, both industries may use less rail capacity for carrying those products as well as
for transporting items such as fracking sand.
Lisa Richardson, executive director of the South Dakota Corn Growers Association,
said turnaround times for railcars to the Pacific Northwest, where crops like corn go
for export, have accelerated in recent months.
Still, grain groups say the real test will come during the first few months of 2015, when
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Railroads, including BNSF Railway, are collectively spending about $2 billion a month in capital investmen1s. BISMARCK
TRIBUNE/ASSOCIATED PRESS
farmers may begin to more aggressively market their corn and soybean crops.
"I think we,re getting through the growing pains/' said Dan Wogsland, executive
director of the North Dakota Grain Growers Association. "But things can tum on a
dime around here."
-Laura Stevens and Jesse Newman
Screws to Tighten on Google in Europe
Google Inc. is under increasing attack across Europe, from taxes and competition law
to Europe's newly established right for individuals to demand removal of information
about themselves from Web searches.
While many of these battles with policy makers and regulators have been simmering
for a while, several likely will come to a boil this year-raising the specter of a
permanently changed relationship between U.S. tech titans and Europe.
Take competition. Google has for years been trying to settle complaints that it abuses
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its dominant position in the online-search market. But Germany is now leading a
charge to convince the European Union's new competition czar, Margrethe Vestager,
to quickly take a harder line against the company-backed by the European parliament.
Or privacy. The way Google has applied Europe's "Right to Be Forgotten" is likely to
tumble into court-or courts-this year as data-protection authorities demand that
Google start scrubbing offending personal results world-wide, not just in Europe.
At the same time, European governments are pushing to pass a tough new data-privacy
law this year that could beef up privacy fines to as much as 5% of a company's global
revenue. And the Luxembourg-based European Court of Justice is expected to rule as
early as summer on whether to end the "Safe Harbor'' mechanism that lets many
companies-including Google-send EU personal data to the U.S.
Taxes will be a hotter topic as well. The Organization for Economic Cooperation and
Development will hit its deadline this fall for completing recommendations for how to
make companies like Google pay more corporate taxes. Complicating matters is the
U.K.'s April deadline to implement its controversial new tax aimed at companies that
divert profit to tax havens-dubbed the "Google Tax."
Southern and eastern flanks in Europe are exposed as well. Spanish publishers' battle
to getting Google may continue after Google removed them from part of Google News.
And in Russia, Google is among the companies that will have to contend with a new law
that by September is slated to force local storage of data about Russians.
Google, for its part, insists that it respects European law and that it injects wealth into
the countries where it operates. The company has sent senior executives across the
region to press its case. But it remains unclear how far those arguments will go-or
whether 2015 will become Google's year to remember.
-Sam Schechner
Retailers SeekFootingAfter Many Missteps
After many tough years, the improving economy may offer new hope for the retail
industry-and if not, there is new leadership to try to fix it.
. The U.S. economy grew at its strongest pace in 11 years in the third quarter.
Consumer confidence surged in early December to its highest level since February
2008, early in the last recession. Unemployment has eased and low gasoline prices are
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providing much needed relief for the country's poorest shoppers.
That may provide some relief for big-box stores Target Corp. and Wal-Mart Stores Inc.,
where shopper visits have declined for eight straight quarters. Other chains including
Sears Holdings Corp., J.C. Penney Co. and Abercrombie & Fitch Co. are all mired in
long slumps as they grapple with changing shopping habits and try to fend off
competition from online retailers like Amazon.com Inc.
Both Wal-Mart and Target notched sales gains in their latest quarter, but at the
expense of profitability as retailers ratcheted up promotions to clock higher revenues.
A new crop of chief executives will be tackling the landscape where a greater share of
shopping is done online. Wal-Mart, Target, Gap Inc., Home Depot Inc., Abercrombie,
American Apparel Inc. and J.C. Penney are among chains with new or soon-to-be new
CE Os.
On the low end, the three largest dollar-store chains remain locked in a merger saga.
Dollar General, the largest chain by number of location and sales, is trying to buy its
close rival, Family Dollar, and scuttle a planned sale to Dollar Tree . A new Family
Dollar shareholder vote is slated for this month.
Retailers will have one thing to be thankful for as they start 2015: Weather. Last year,
the first few months of shopping were hit hard by frigid weather that swept across the
U.S. Forecasters predict that a milder spring could bring another measure of relief.
-Paul Ziobro
Bigger, Better Drones, But Not Drone Rules
Drones made the leap from the battlefields to American backyards last year, raising
concerns about air safety, privacy and regulation.
In 2015, unmanned aircraft in the U.S. will continue to multiply, likely exacerbating the
issues of 2014 while U.S. regulators try to finish rules for the devices.
The Federal Aviation Administration missed its self-imposed deadline of Dec. 22 to
propose rules for small commercial drones in the U.S.-regulations it began working on
more than five years ago. The agency expects to propose the rules by early 2015,
launching a public-comment period that it expects to draw tens of thousands of
comments.
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For that reason, 2015 will be
a crucial year for drones in
the U.S. Those excited for
the technology-and those
concerned about it-will be
able to voice their opinions
on how the government
should regulate drones.
Regulators are required to
consider comments, which
often help craft final rules.
Meanwhile, many U.S.
The FAA expects to soon propose rules for small commercial drones. REUTERS entrepreneurs are using the
devices despite an effective
ban on their commercial use by the FAA. Officially, the FAA has approved just 13
commercial drones through a case-by-case approval process the agency is using to ease
pent-up demand.
There are more than 140 pending applications for such exemptions, and the FAA plans
to issue more approvals in 2015, likely turning a few big companies into drone users.
Chevron Corp. wants to use drones to monitor its oil and gas plants, for instance, and
State Farm Insurance Cos. wants to use them to conduct insurance inspections after
natural disasters.
Another company will likely turn into a drone maker in 2015. GoPro Inc., the wearablecamera
maker, is aiming to launch its own line of consumer drones in late 2015, priced
between $500 and $1,000, according to people familiar with the company's plans.
Meanwhile, Amazon.com has said that 2015 would be the year it introduces its delivery
drones-if the FAA establishes rules for the devices by then. But the holdup in
regulations will almost certainly delay thee-retailer's plans.
The Government Accountability Office recently said the FAA won't issue final rules for
commercial drones until late 2016 or early 2017. Delivery drones will likely have to wait
until then.
-JackNicas
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