The Great US Healthcare Debate—Is There a Rational Solution?

While this blog normally discusses issues affecting the Pharmaceutical and allied industry sectors, I think that the health care reform being “discussed” in the US is worthy of some focus. It is quite unfortunate that at least to my mind, we in the US are in the midst of a most difficult debate that goes to the very core of what our country and our values are. What is very clear to me is that the “Health care Reform” effort by the Obama administration is an enormous challenge, coated with many mistruths by both sides, wrapped around powerful special interests who are dead set against it, layered with good intentions and poor management and execution. My point is to put a perspective on what I think is going on and what the potential benefits and problems are in solving this enormous problem.

As best as I can tell the following “facts” are known:

Healthcare is expensive consuming arguably between 17-20% of GDP
Healthcare costs are growing disproportionately higher than economic growth
Value for money received as measured against other countries is well below many developed and emerging countries
The quality of service is very uneven with a shortage of primary care physicians and a disproportionately higher concentration of providers (physicians and hospitals) in urban centers
There are over 650,000 doctors serving our population of about 300,000,000 people (1:460)
There are somewhere between 40-50 million uninsured people and several times that number who are underinsured.
Due to the litigious nature of our society, much “defensive” medicine is being practiced and insurance rates for practitioners are very, very expensive and contribute to high healthcare costs.
There is significant fraud and inefficiencies in our current healthcare systems
Healthcare will be rationed by a government based system and the government can't run anything efficiently and furthermore it's more “socialization” of our great country.
The pharmaceutical industry is viewed as gouging the public and making obscene profits
Most of the developed world has a “single payer” systems and while there are many horror stories, by and large the systems work “better” and are more cost effective
There is an enormous concern with the American people about losing existing benefits, excessive costs of a newer system and is it “fair” to provide healthcare to all on an equal basis.

Some issues to consider, at least in my opinion are:

While we vociferously argue about what healthcare is currently like and what it may be, there is no single proposal that is available for discussion.
As an ENT physician in Haymarket, VA said to me, who says that 17-20% is a bad number-if my practice bills $1 million/year, there is 4-5 times that created in goods and services including laboratory tests, hospital visits, diagnostics, etc. Isn't that a great way to stimulate the economy?
Assuming a way was found to include on a somewhat equal basis the 40-50,000,000 uninsured and the multiple of that in underinsured, how do we find the provider capacity (doctors, clinics, hospitals, testing facilities, etc.), the administrative capacity to process the additional workloads and the technology and smarts to manage all of these moving parts?
The thought that healthcare will be rationed is a red herring in that to a large extent, existing insurance companies are determining level and quality of care today. I wonder if they are any more effective and/or efficient than the government would be. By the way as I understand it, the government today does run a world class healthcare business called the Veteran's Administration (VA) which provides outstanding service and has implemented an excellent electronic patient record system (EPRS).
Notably absent from the discussions I have heard is the lack or absence of discussions about reforming malpractice suits and other associated legal issues-could that be because of the previous career choices of many of our Congress and Executive branch.
The Pharmaceutical Industry and its adjacent industry sub-sectors are in the rifle sites of congress, however as we have stated before, with 40-50 million new covered lives and an average spend of $800/year (even $500/year if there is the 40% reduction in spend many discuss), there are billions in incremental revenue available, and in my opinion actually enhanced by the Comparative Effectiveness Scheme.

Your thoughts are as always welcome at larryrothmansblog@gmail.com

The Pharmaceutical Industry Gives the Obama Health Care Initiative $80 Billion and Can Come Out with a Bigger Prize—Who are the Winners??

The Obama administration's push to drive healthcare costs down may not be all bad news for the Biopharmaceutical Industry. While the industry today announced/agreed an $80 billion reduction over 10 years ($8 billion/year) in cost reductions to Medicare, they may be able to recoup a piece of that assuming the uninsured population become covered under a plan that encompasses prescription drug costs.

Incremental revenues could jump by $6-50 billion/year based on the assumptions one uses in per capita spend on pharmaceuticals and number of people whom would actually be covered under the plan. Taking a very conservative midpoint of 20 million incremental increase in covered people and a midpoint spend of $750/year per consumer on pharmaceuticals yields an additional $15 billion per year in revenues which equates to $150 billion over the 10 year life of the program that the industry (generously?) proposed.

Predicting he winners in such a scenario becomes an interesting exercise. As generic drugs account for about 2/3 of total prescriptions (by volume) and have growth rates in the 14-15% range in the US (versus flat or perhaps slightly negative growth of branded pharmaceuticals), one immediately has to focus on them both as a pure play and as part of the diversification strategy of large pharmaceutical companies.

On top of my list would Teva (NASDAQ:TEVA) followed by Mylan (NASDAQ:MYL) and Watson (NYSE:WPI) as near pure play generic manufacturers.

TEVA is rumored to be looking for additional acquisitions in both generics and specialty pharmaceuticals, is extremely well managed and positioned for growth both in the US and globally. Watson's recently agreed acquisition of Arrow Group which gives it a more global reach at a good price.

In the traditional large pharmaceutical space, my top pick would be Novartis (NYSE:NVS)-through its Sandoz unit as well as numerous European and emerging market generic initiatives and a strong piepline. We would then suggest that to a lesser extent, GlaxoSmithKline (NYSE:GSK) -with its numerous acquisitions, especially Ranbaxy agreement recently announced and Sanofi-Aventis (NYSE:SNY) with its broad base, generic and emerging market strategies are likely to thrive in this highly cost controlled, regulated, competitive environment.

We would be remiss to leave out Johnson & Johnson (NYSE:JNJ), not for its generic capabilities (near zero) or its eroding pharmaceutical product base, but more for its business model based on enormous diversification broadly across healthcare including branded pharmaceuticals, biotechnology, medical devices, diagnostics, consumer health and health informatics suggests that it is well positioned for the future. Finally, Shire (NASDAQ:SHPGY) is intriguing based on its business model of being a “virtual” pharmaceutical business that has decoupled itself from many of the overheads of R&D.

Contrarianism Lives!

There seems to have been a lot of writing recently about the lack of merger activity and what may be possible. Amgen seems to be getting a bit of ink too, but, then that one always seems to. First, Julie MacIntosh of the Financial Times published an interesting piece (http://www.ft.com/cms/s/0/57ccbec6-db91-11dd-be53-000077b07658.html ) concerning this subject on their website this January 6th. Her take was that the mergers and acquisitions market would be slow in coming back as companies assess risks and investment advisors want to appear cautious in recommending deals. Earlier in the week, Andrew Jack, also of the Financial Times speculated (http://www.ft.com/cms/s/0/20d8f19e-da8a-11dd-8c28-000077b07658.html ) about Pfizer entering into a large acquisition of a rival and what it might lead to in a pharmaceutical industry shying away from the large deals that spawned many of today’s Big Pharma companies. His musings were based on comments by Jeff Kindler, Pfizer’s CEO. He noted debates in the investment community about Pfizer acquiring Amgen. (CNBC had also reported this story.) As I wrote earlier, that’s an old story heard many times before.
What I find interesting here is how from very substance, a lot of speculation is going on. As I blogged earlier, I don’t think there is much of a market for large deals in the pharmaceutical industry right now. I find myself more in agreement with Julie MacIntosh about deal prospects in the industry. That is, the length and breadth of this recession will determine people’s willingness to return to the deal markets. Like I wrote earlier, she quotes Mark Shafir, the global mergers and acquisitions head at Citibank, who believes that bankrupt or near bankrupt companies will provide the first wave of opportunities. He goes further saying that cash rich companies may then begin to prowl for values. But, all this will take time. While these activities may start this year, I don’t think that they will culminate in any significant deal activity until 2010 at the earliest.
I know that some people have been writing about 2009 being the big year for drug company acquisitions. I’m just not buying into it. Let’s see what comes of these vaunted pipelines. Let’s see what happens when a President Obama instructs Medicare to negotiate drug prices with the drug companies. (I’ve always found it interesting that when corporations squeeze their vendors for lower costs, it’s capitalism; when the government does it, it’s Marxism.) As this blog has repeatedly said over the last year, there is too much capacity in the drug industry. Whatever deals happen this year will be restructurings designed to handle this fundamental problem.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.


Contributed by Guy de Lastin