In today’s Exponential Investor

  • The great American regulator is a myth
  • OxyContin – the painkiller which causes more
  • Implications for investing in US technology companies

They said it wasn’t a gateway drug
My homie was takin’ subs and he ain’t wake up
The whole while these billionaires, they kicked up
Payin’ out congress so we take their drugs
Murderers who will never face the judge

Those are the opening lyrics of the song “Drug Dealer” by Macklemore, a popular US rapper/singer.

“Regulatory capture” is the subversion of public institutions by private enterprise.

It seems to be especially prevalent in the United States, and I’m curious as to why that might be.

Big Oil covering up the science of climate change. Tobacco companies fighting tooth and nail to fight research linking smoking to cancer. These are just two examples.

And the book I just read – Empire of Pain, by James Madden Keefe – lays out the entire history of the Sackler family who are perhaps the key driving force behind the current opioid crisis in the United States, and have fought with unbelievable success against any litigation suggesting they take even a fraction of the blame.

Regulatory capture plays a huge role in this. Like all well-organised lobbies, the gun and oil lobbies in the United States are well aware that much of their future success relies on their support for political causes.

This was evident in Texas earlier in the year, when it was the biggest recipients of oil money who came out peddling lies on social media and the news about renewables being to blame.

Regulatory capture is so vital to the continuation of businesses whose outcomes for society are negative.

Regulated industries devote large budgets to influencing regulators at federal, state, and local levels. By contrast, individual citizens spend only limited resources to advocate for their own rights.

The pool of high-level people in an industry often know one another, and people move from regulated organisations to regulator and vice-versa.

The last five decades of American history are uniquely dominated by big corporates covering up the evil consequences of their products – cigarettes, fossil fuels and painkillers, and now social media too.

Case study: OxyContin

A case in point is the opioid crisis, which is ripping through American society.

In 2016, nearly 215 million prescriptions for opioids were filled in the United States. Nearly 850,000 people have died since 1999 from a drug overdose. Over two thirds of drug overdose deaths in 2019 involved an opioid.

Drug overdoses are now the top cause of accidental death for all Americans under age 50. Opioid overdose deaths have surpassed the all-time peaks of annual deaths caused by car crashes, HIV, and guns. Today’s opioid mortality crisis dwarfs earlier waves in the 1970s and the years around 1990.

It all began with OxyContin, also referenced by Macklemore in a different song, “Otherside”:

I’ve seen my people’s dreams die
I’ve seen what they can be denied
And “weeds not a drug” – that’s denial
Groundhog Day life repeat each time
I’ve seen Oxycontin take three lives
I grew up with them, we used to chief dimes

OxyContin was a painkiller. Back in the day, American doctors were reluctant to prescribe painkillers, for fear of their addictive properties.

Purdue Pharma, run by the highly philanthropic but unrepentant Sackler family, changed this. Having been responsible for earlier versions like Valium, they took things to the next step with OxyContin. It contained oxycodone, up to twice as powerful as morphine.

But thanks to their design, a slow-release pill coating, they were allowed to claim that it was less addictive. In fact, they claimed that the risk of addiction was less than 1%.

Neither were backed up by testing or evidence, so how were they able to get it past the FDA (Food and Drug Administration – the “regulator” which is now determining which vaccines are safe or not)?

Well, this is where regulatory capture came in.

They worked hard to forge the right links. Lunches, gifts, former employees, and contracts with sister businesses or the promise of lucrative private sector jobs later in life…

“For most of these 25 years, the FDA has been essentially a toothless paper tiger without any real appearance of restraining the marketing and labeling of OxyContin to protect the public.” So saidSenator Richard Blumenthal, from Connecticut, who sued Purdue and the FDA when he was state attorney general. “Repeatedly, the agency has refused to act to impose restraints on Purdue that would literally save lives.”

The FDA also allowed the drug to be marketed not just to patients with high levels of pain, like late-stage cancer patients, but to small maladies of all kinds – the regular back pain that afflicts so many of us, aches and creaks of all kinds.

So its market was enormous, and it pushed the largest and longest prescriptions to increase its revenue.

Incentives are everything.

Charlie Munger – the long-time partner of legendary investor Warren Buffett – likes to say, “Show me an incentive and I’ll show you the outcome”. That is to say, people are hard-wired to follow the incentives placed in front of them.

Under the Friedman principle of capitalism, formulated and adopted in the 1970s, American companies in particular see the pursuit of profits for the benefit of shareholders to be the only and ultimate goal of running a business.

The only incentive is profit or, in other words, money.

Under such a guiding principle, is it any surprise that recent US corporate history is littered with examples of high-level regulatory capture, at scale?

Now, I don’t believe that oil companies should be punished for selling the stuff when we’re all greedily consuming it. Like the war on drugs, trying to tackle the problem by hitting suppliers will just move and reshape the problem, not end it. It’s the demand side which needs work (through green electrification and more).

However, this argument falls short when big businesses have worked very hard to cover up the harmful effects of their products (emission or addiction).

The big question – and a sensible answer

For investors – and investors in Big Tech in particular – the key question is this: who is likely to come out on top – the regulated or regulators?

It may be correct to invest according to the principle that a certain industry (e.g. European pharma) has the government(s) in thrall and so is unlikely to come under intense regulation.

Alternatively, if you see regulation coming (as appears to be the case for Big Tech) it is probably wise to taper your holdings somewhat. Like OxyContin, the products of social media and tech giants are full of hidden costs and drawbacks that we hardly perceive, until the problems become systemic.

And now the regulators have woken up, and as we’ve seen in China, this can have dramatic consequences for the share prices of the companies involved.

Some caution would seem prudent, but that does not seem to be a quality that US investors have in abundance these days.

The recent events in Afghanistan have had awful and real human costs. They have had little impact on the global economy or financial markets.

However, the Taliban’s rise to power highlights something that is relevant to all investors: when things start to go wrong, they often go very badly wrong far faster than anyone could have imagined.

It seems too obvious to say, but it’s much better to be cautious before anything terrible happens.

But to do so requires caution when it seems unnecessary… and a lot of people think that caution is unnecessary today.

Remember, “When the time comes to sell, you won’t want to.”

Until next time,

Kit Winder
Co-editor, Exponential Investor

PS. “Regulation is also coming for the crypto industry, according to SEC chairman, Gary Gensler. Is this enough to derail the bitcoin train? Find out here.”