Thursday, July 24, 2008

Social Opportunities

Which social opportunity is worth more: the ballgame with your buddies, or your profile in your alma mater's directory?

While taking considerably more time and money, the ballgame directly connects you, friends and acquaintances to a common experience.

A directory listing, by comparison, is basically costless. Though possibly translating into some sort of ROI, a person or small group ultimately dictates its capabilities. It’s their space after all – not yours.

What might this tell us about the value of social networks? Would a more compelling model be one that facilitates the individual's ability to seek-out social opportunities regardless of location?

It's worth keeping an eye on how Google and Facebook resolve their spat over Friend Connect, as well as other groups such as Bob Bickel's Ringside Networks whose open-source Social Application Server targets seamless connections among communities.

But the opening of walled gardens ultimately leads us to ask: who controls the individual's profile, especially as greater choice leads to more precise information?

What if someone could develop an electronic ID card that enables access to any social network: an identity that the individual controls, and which doesn’t appear under a Google, Microsoft, Amazon or Facebook brand?

Though something such as OpenID might represent the first steps, we suspect that the current debate on personal health records will contribute significantly to how this evolves.

Wednesday, July 23, 2008

Pain Enough?

The problem with something as complex as health care reform is that exact numbers can never really be exact. So many different factors come into play that it's almost pointless to provide any level of detail, except that the media craves it.

And so the New York Times has called attention to the Obama campaign pitch of $2,500 in premium savings for the typical family.

Health care reform is a messy topic for aspiring presidents: it involves hundreds of millions of dollars in lobbying, a tense public-private relationship, and a merry-go-round of who's to blame.

But at 16% of GDP, health care is becoming too big to ignore, and the electorate just might be unnerved enough to demand a major strategic review.

At the very least, both parties would agree that considerable inefficiencies bloat the system. Rather than a major federal overhaul, one approach might be targeting a series of non-compromised small-scale reforms: for example, force all payers to use the National Drug Code for biopharmaceutical reimbursement. This alone could save tens of billions in current and future dollars.

Whether during the next administration or future ones, the economic burden of not taking cost-savings steps will become too pressing to ignore.

Maybe now, major change – such as the cessation of employer-based coverage – is possible.

We suspect there isn’t quite enough pain just yet.

Monday, July 21, 2008

The Right Strategy?

What does Roche’s bid for the remaining shares in Genentech say about pricing power?

First, consider the Big Pharma business model of owning everything under the sun: it hasn’t worked. Since the last merger wave, the industry has destroyed immense value, and not just because of fewer drug approvals. Scale in-efficiencies are widespread: overlapping R&D, disjointed business areas and sagging culture, to name a few. (Since its 2000 peak, the industry has dropped 25% against the S&P 500.)

Second, consider the industry’s value shift away from price inflation to utilization. More prevalent chronic disease conditions due to an aging population and advances in diagnostics will accelerate the rate and intensity of treatments in years to come; also, add to this the likely enactment of a pathway enabling follow-on (“generic”) biologics.

For some manufacturers such as Roche, this – and the prospect of a new government less accepting of their policy positions – fortifies the urge to merge: a gambit for economic advantage.

They may also view combinations as hedges against a balance-of-power shift in favor of the supply chain, as has occurred for nonspecialty products.

(Let’s not forget the influence of bankers aiming to replenish depleted coffers.)

Instead, management should explore game-changing business designs that build flexibility, and, most important, improved communication with consumers and payers.

Coding Specialty

Although employer groups and health plans enjoy extensive data on self-administered drugs such as insulin and your standard bottle of pills, the same cannot be said for specialty pharmaceuticals.

specialty category represents 11% of pharmacy plan spending (a doubling from four years ago), and is growing at three times the industry average. Broadly d
efined as high-touch physician-administered medications (injected, infused and, in some cases, ingested), it encompasses most biologics, and also one-third of the industry pipeline. P
ractitioners expect personalized medicine and the shift of many illnesses from acute to chronic conditions to drive utilization over the long haul.

Data collection centers on drug coding practices.
Because specialty qualifies as a medical expense, the industry reimburses according to a different set of codes than for self-administered drugs, deemed a pharmacy expense.

Often misrepresenting both the drug and dosage, these "J-codes” can generate imprecise or misleading information.
In contrast, the National Drug Codes (NDCs) used for all other pharmaceuticals provide a more accurate level of detail, though largely the purview of pharmacy benefit managers.

As of January 2008, the Deficit Reduction Act of 2005 requires state Medicaid programs to recognize NDCs, but uptake has been slow, and a Medicare overhaul unlikely.

For now, information asymmetry favors manufacturers, but new specialty pharmacy management tools could shift this to the supply chain.

Friday, July 18, 2008

The Cancer in Public-Private Enterprise

Imagine a business where you and a partner or two are on the hook for millions of dollars in receivables, most of which is not collected for 60 days or more, and some of which is never collected at all. Now imagine that the person paying is not the person consuming, and that the level you bill at is often less than the level at which you purchase. Oh, and you're dealing in high-touch products that could kill or severely debilitate.

This is the business environment in which oncologists operate. Cancer care is a $90 billion industry growing about 10% a year, and likely to increase by even more as America grays and scores of new drugs come to market. (The NIH puts the total bill at $220 billion, including $130 billion in indirect costs.)

Beyond just the decades-long buy-and-bill practice and the government's decision to alter how it reimburses oncologists, the larger force at play here is the inefficiency of public-private enterprise.

Name another industry where pricing occurs irrespective of the marketplace.

And while community oncologists (about 84% of the market) should consolidate to regain purchasing power, and health plans and PBMs fight to position specialty pharmacy tools for better utilization, such strategic decisions cannot occur without regard to the government, the default price-setter in its influence of everything from reimbursement to claims adjudication.

Monday, July 14, 2008

Exit Strategies

Each decade features a particular brand of market volatility. Contributing factors have included an oil embargo, technical issues such as program trading, accounting scandals, housing supply-demand imbalances, and a credit squeeze.

The current version comes just a few years after the most volatile six-year period since before 1950. From 1997 to 2003 (March to March), the market – S&P 500 – averaged a 2%-or-more move every 8.1 days. In 2002, this pace accelerated to just under five days, or one day a week. (That year, the market also averaged a 3%-or-more move every 14.7 days!)

2008 is pacing at 7.4 days (26.6 days for 3% moves), and 7.6 days going back to July 2007. This follows no major moves the whole of 2004 and 2005, and only two in 2006.

Both versions occurred in this unique period of widely available instant information and communication. In fact, we might think of them as the beginning and end of a decade-long “trade” – the entrance and exit of aggressive short-term investment strategies.

While market conditions allowed this category to flourish during the first bout (who else could benefit as much during a three-year sell-off in extreme volatility), conditions now threaten many with extinction.

Saturday, July 12, 2008

Unhealthy Dragon

High-profile experts project Chinese economic dominance over the 21st century, and the woeful US greenback apparently agrees with this assessment. But optimists seem to be overlooking a fundamental risk factor: China's health.

According to UN population data (using our calculations), the number of people in China over the age of 65 in 2030 will increase by 146 million, or more than 10% of today's population. And while this is proportionate to the US (in which there already exists lots of action-oriented debate), the total number of people under 30 will shrink by 13%, courtesy of the one-child policy; the US level is expected to remain unchanged. In fact, China will have a larger percentage over 45: 46% versus 43% (current levels are 33% and 41%, respectively).

The editors of Health Affairs dedicate the current issue to major health concerns in both China and India (and, by implication, major commercial opportunities). Experts, for example, rank the growth of obesity in China among the fastest in the world – far ahead of the US. Diabetes incidence could, therefore, double, and cardiovascular-related deaths triple, as older adults bear the majority of related costs.

And the problem could exacerbate the socioeconomic patterns already separating rural and urban populations, as health care delivery -- both in funding and in practice -- favors city-dwellers.

The dragon might be growing, but so are its girth and age.

Wednesday, July 9, 2008

Churn and Burn

In the investment business, a 100% turnover rate means that, over a one-year period, a manager buys and sells his entire portfolio; 50% equals two years, and 200% six months. No matter his level of "churn", he passes through all transaction costs to shareholders, and also any capital gains tax liabilities – or tax losses.

Each year until 1997 the mutual fund industry recorded higher average asset-weighted turnover than the New York Stock Exchange, though no higher than 82% in 1987. Since then, this rate has declined by about a quarter (now 50%), while the NYSE’s has doubled (130%). No surprise, considering the simultaneous rise of hedge funds and proprietary trading desks – so-called “alternative strategies”.

With mutual funds, pension funds and insurance companies holding about half of publicly-traded equity (according to Fed data) and having roughly the same turnover, the implied rate for the other half – including individuals – is 200%+. The alternative strategy category boasts a rate multiples higher.

Assuming 30% market share in trading volume and between five and 10% equity ownership (depending on leverage), the level could be between 300% and 600%; in other words, an entire portfolio bought and sold every two to four months on average. A large amount of this high-churn flow, moreover, constitutes "recycled dollars" – money traded among a handful of large banks and their clients.

For a market desperately needing balance, we wonder whether liquidity is not becoming too concentrated.

Monday, July 7, 2008

Two Steps Forward

Democrats and Republicans agree that IT has become a key component in the evolution of health care. Most folks would also agree that its biggest problems are neither a lack of advanced applications nor their availability, but the failures of systems to interoperate and end-users to implement them.

An application as simple as one that would allow a physician to electronically prescribe a medication contains all sorts of bugbears: hardware installation costs, competing software standards, and complex formulary models that vary across drug management plans, to name a few. Personal electronic data also risks public exposure: Privacy concerns are paramount, especially to the consumer.

On June 25th, leading technology companies, providers, payers and consumer groups endorsed a common set of practices that allows Internet-driven personal health records to coexist. As a result, Google, Microsoft and others will now innovate around a common framework.

Then, announcing a merger of equals on July 1st, Rx Hub and SureScripts will develop a single exchange network for electronic prescribing. Once combatants, the two companies unite their routing networks, so that physicians can instantaneously access information on medication history and coverage and route scripts to preferred pharmacies. This should also encourage more focused innovation as with personal health records.

Both events advance the health IT opportunity two huge steps forward. Both occurred as private-industry initiatives.

Saturday, July 5, 2008

Broken Walls

The current issue of Newsweek highlights what's now become a commonplace dynamic, but one worth revisiting as we think about how different industries are evolving. The article states, "'s most valuable employees will most likely never set foot inside the building—or collect a paycheck." It refers to the economic impact of user-generated content. YouTube users, it notes, upload the equivalent of 57,000 full-length feature films each week.

Although many folks have analyzed and described mass collaboration as a game-changing force in the media and entertainment industry, we suspect its reach has extended well across the broader economy. Consider health care and financial services: each one now facing considerable pressure, and in need of re-designed strategy. Both are similar to media in that intellectual capital plays a key role in product development. Both, though, mirror each other in the complex web of regulations that entangle them, which often lead to obscured pricing and indeterminate accountability.

Should these industries' corporate bosses likewise reconsider how they construct the traditional four walls – or, perhaps more importantly, should regulators and legislators take steps to allow this to happen?

Failing to pursue these questions
ignores market reality.