The FDA Commissioner Divests

Dr Margaret Hamburg, having been confirmed by the US Senate, is the new commissioner of the US Food and Drug Administration (FDA). We posted twice about whether her and her family's financial relationships might be relevant to her nomination.

Here we discussed her position on the board of directors of Henry Schein, Inc a medical supply company. My concern was whether someone who had spent years being ultimately responsible for maximizing the profits of a medical supply company would be able to be a fair, and when necessary, tough regulator of the companies that supply Henry Schein with products to sell.

Here we discussed Dr Hamburg's husband's leadership of the hedge fund management company, Renaissance Technologies. My concern was whether someone who is part of a family that had gotten rich from buying and selling stocks and financial instruments, of which a likely substantial but unknown fraction were of health care corporations, would again be able to be a fair, and when necessary tough regulator of some of these same companies.

At the time, it did not seem that anyone else shared these concerns. As far as I could tell, there was no discussion of them in the press, or at Dr Hamburg's confirmation hearings.

However, today the Wall Street Journal reported:

The new commissioner of the Food and Drug Administration is among the wealthiest Obama administration appointees, with income of at least $10 million in 2008 thanks mostly to her husband, a hedge-fund executive, according to financial disclosure forms.

Margaret Hamburg and her husband, Peter Fitzhugh Brown, must divest themselves of several hedge-fund holdings as well as some of Mr. Brown's inherited drug-company stocks so Dr. Hamburg can take the post as the nation's top food and drug regulator. Mr. Brown is a lieutenant to hedge-fund magnate James Simons

The couple's income in 2008 came from stocks, money-market accounts, trusts and funds including several affiliated with hedge-fund sponsor Renaissance Technologies, where Mr. Brown works.

The couple controls assets worth between $21 million and $40 million, according to disclosure forms Dr. Hamburg gave the White House. The forms don't reveal exact figures, just ranges.

Before her FDA nomination, Dr. Hamburg also served for five years on the board of Henry Schein Inc., a $4 billion firm that distributes medical and dental supplies including vaccines. Her remuneration has been in the form of Schein shares.

She will forfeit $100,000 to $250,000 in restricted stock and more than 11,000 unvested stock options, all of which have a strike price above market value. She will also have to sell vested stock, valued between $250,000 and $500,000.

Mr. Brown, an expert in artificial intelligence, is vice president and director at Renaissance Technologies. The fund company said recently its total assets were about $18 billion. Mr. Simons was the top-paid hedge-fund manager in 2008, receiving $2.5 billion, according to Alpha magazine.

A lengthy review by the Government Ethics Office, which included direct discussions with Renaissance managers, determined that both Dr. Hamburg and her husband will have to get rid of their interest in four Renaissance funds—the Renaissance Institutional Equities Fund, the Renaissance Institutional Futures Fund, Meritage Investors and Topspin Partners.

However, the couple will be allowed to retain their interest in Renaissance's Medallion fund. An administration official said Medallion was exempted because its computerized quantitative model trades rapidly and holds shares only briefly, creating the equivalent of 'a very blind trust.'

Mr. Brown has already sold his stock in Abbott Laboratories and shares in Johnson & Johnson, Merck & Co. and Medco Health Solutions Inc., which he inherited from his father.

So it appears, in retrospect, that the Government Ethics Office also felt that Dr Hamburg's position on the Henry Schein Inc board constituted a conflict of interest. Furthermore, the Office felt that Dr Hamburg's and Mr Brown's holdings in several hedge funds constituted conflicts of interest. So, in retrospect, it is odd that these financial relationships attracted no attention other than that of Health Care Renewal prior to Dr Hamburg's confirmation by the Senate. I do hope that now, having severed significant relationships and sold financial holdings, Dr Hamburg will prove to be a fair, and tough when necessary regulator of companies that have too often misbehaved.

Post Title → The FDA Commissioner Divests

Hedging the Future of the FDA?

A little while ago, we discussed the Obama administration's nomination for Commissioner of the US Food and Drug Administration (FDA), Dr Margaret Hamburg, focused on her current position as a director of Henry Schein Inc, a large distributor of medical products, including drugs and devices. There is another aspect of her nomination worthy of discussion, but which has not been publicly discussed. It has appeared almost as a footnote in a few reports of her nomination. For example, at the end of an article in the Chicago Tribune,

Hamburg is married to Peter Fitzhugh Brown, an artificial intelligence expert who is executive vice president and director of Renaissance Technologies, a privately owned hedge fund.

In this time of financial meltdown, hedge funds are more frequently mentioned in the press. Hedge funds are a relatively new, and generally opaque presence in the financial world. Hedge funds apparently buy and sell stocks, bonds, commodities, financial instruments, and use a variety of investment strategies. Since health care accounts for over $2 trillion of the US economy, it seems possible that hedge funds might be involved in stocks, bonds, and the finances in general of health care corporations. We therefore wondered Mr Brown's position at the hedge fund management company Renaissance Technologies might have something to do with health care, particularly with health care corporations that make products regulated by the FDA. It turns out that this question has no simple answer.

Hedge funds are often described as secretive and lightly regulated. This seems accurate, as it is not easy to find out much about their operations, strategy, holdings, or leadership. My usual Google searching tricks did not turn up much useful about Renaissance Technologies.

Most helpful was a 2008 article in Bloomberg News, which labeled the company as "the world's largest hedge fund manager." It was managing $35.4 billion in assets in September, 2007.

The Bloomberg reporter's attempt to find out something about the company's strategies was a failure, summarized by his conclusion, "nobody knows precisely how the firm makes its millions." When the funds founder, Jim Simons, was asked what he can say about his trading strategy, he answered, "not much." The instruments he trades? - "everything." The strategies he uses? - "a lot."

The only publicly available information about the company's holdings is in its 13F filings with the US Securities and Exchange Commission (SEC). The 2009 filing, covering 2008, is here. The filing only covers long stock holdings at the end of the year. Lacking a research staff, I have not been able to go through the voluminous report in detail, but do note that the company at times invested in health care corporations from A ([Abbott Laboratories, valued at $88,909,000) to Z (Zimmer Holdings, $7,858,000).

I had little luck finding out the role of Mr Brown within the company, and whether he has any personal responsibility for making decisions about investments in any health care corporations. But I did find that a prominent Renaissance Technologies fund, the Medallion Fund, worth $6 billion in July, 2007, is owned mostly by Renaissance Technologies employees, presumably including Mr Brown, not outside investors, "Medallion stopped taking new money from outside investors in 1993 and returned pretty much the last of their capital 12 years later. Today, the fund is run almost exclusively for the benefit of the Renaissance staff." Furthermore, most of Renaissance Technologies is now owned by its founder and a few top officers, including in particular, Peter Fitzhugh Brown, who the Bloomberg article reported as owning "5-10 percent."

So, does Mr Brown's position in and partial ownership of Renaissance Technologies amount to a conflict of interest with respect to his wife's proposed position as Commissioner of the FDA? It is not clear. Mr Brown works for a company that manages billions of dollars, and likely a good chunk of that money is invested in instruments related to health care corporations. Mr Brown now presumably a goodly number of shares of the company's premier fund, and owns a substantial minority interest in the company as a whole. Hence he indirectly probably owns a substantial amount of such instruments. Whether he has any direct decision making responsibility for the buying and selling of such instruments is unclear.

Therefore, it seems that Dr Hamburg actually has a "potential conflict of interest" arising out of her husband's role in Renaissance Technologies. In academic conflict of interest policies, that phrase often appears without a definition, perhaps to soften the words so often applied now to medical academics. But this seems to be a real instance in which it should be used.

The shadows cast by the increasing opacity of the world of finance, now dominated as never before by organizations such as hedge funds that control large pools of investment about which regulations compel little disclosure, now seem to be darkening health care.

In my humble opinion, the Senate hearings on Dr Hamburg's confirmation ought to determine whether this potential conflict is more than that. Furthermore, we need a broader dialogue about how to dispel the shadows and secrecy that the dark arts of finance have spread to health care.

Post Title → Hedging the Future of the FDA?