Saturday, March 21, 2009

Health IT and Unintended Consequences

The appointment of a new health IT czar puts a face to the administration's ambitious goal of digitizing health care, specifically pushing wider-scale usage of electronic medical records (EMRs). Dr. David Blumenthal will wield considerable power, having a $20 billion budget and a multitude of recession-weary technology vendors genuflecting for his handouts.

Depending on how he manages this process, we could well expect a smaller-scale version of the financial stability plan. For the various constituents that his EMR edict will impact, the same drama could very well unfold. Like the legislative process we've come to know all too well these past few weeks, countless consultations will likely take place – most behind closed doors and among industry spokespeople, perhaps even one or two practitioners.

On the other hand, Dr. Blumenthal might decide not to waste anyone's time, and simply promulgate.

Just as we could draft a 1,000 page stimulus bill and not anticipate political fall-out from its minutiae, a similar approach to deciding what standards should apply to EMRs could likewise contort the system in unintended ways.

The fact is, health care is a complex game of many different disciplines, making data uniformity improbable.

If Medicare's committee-based decision-making is not proof enough that the smart guys aren't smarter than what the market could do, then maybe Washington's current tussles resonate more deeply.

Maybe, though, there's a twist here: These are techies we're talking about, socially networked folks, many of whom advocate the virtues of open source solutions.

Does the prospect of government decrees not contradict this entrenched propensity toward self-determined collaboration? Has this entered into the political calculus?

We shall see.

Sunday, March 15, 2009

Follow On Biologics and Better Market Information

Baseball stars have been injecting human growth hormone (HGH) for at least a decade, if not longer. As a prescribed medication, HGH can cost several thousand dollars a year. It would seem prohibitive if not for its prevalent off-label use, not uncommon among high school athletes and anti-aging enthusiasts.

There's a much larger indirect cost, however, in misinformation, especially down the health value chain from manufacturers.

Last week, Rep. Henry Waxman introduced a bill enabling a pathway for follow on biologics – a re-submission of legislation first introduced in September 2006. Its timing, early in the congressional calendar and after an extended period of intense debate, strongly suggests that some version could pass this year.

Waxman's powerful committee chairmanship, moreover, and the Democrats' control of government favor terms closer to his liking. Where BIO and others have advocated 14 years of data exclusivity, expect his bill's five years to shorten this number in final draft.

And while a pathway could in fact boost the fortunes of innovators (development will require both know-how and deep pockets that incumbents possess), specialty pharmacy could be one of its biggest beneficiaries. Legal recognition of just "similar" products, let alone interchangeables, would provide critical cover for these drug benefit managers to apply the same principles to injected and infused products as the non-specialty folks now do with orals.

For a treatment originally targeting dwarfism, HGH's burgeoning application threatens considerable misunderstanding about its risks. The best way to assess and monitor off-label use would be to increase market transparency.

An effective pathway that allows the value chain to engage on HGH – and the increasing number of other biologics – would establish a more efficient and safer environment than currently exists.

Monday, March 9, 2009

One Plus One? Please, Anything Above One!

In the world of big pharma M&A, one plus one doesn't have to equal two. But that's okay, as long as everyone's comfortable with something – anything – above one.

As Merck and Schering-Plough follow Pfizer and Wyeth down the aisle, shareholders are asking whether the love won't be lost before short-term margin gains wear out: that is, when everyone realizes it was all about the cost-cutting.

As the chart below illustrates, however, these latest nuptials come at a much different point in the economic cycle (click to enlarge). In contrast to previous tie-ups, these two, and perhaps others that follow, can at least bank on an economic uptick once merger synergies run dry.



Note: our chart shows the relative performance of the AMEX Pharmaceutical Index (blue) against the S&P 500 (red), dating back to 1996 when Novartis was formed. It indicates mergers at the time of completion. Most deals were announced nine to 12 months in advance.

The wild card is, of course, the FDA, and whether it can move beyond its post-Vioxx lock-down on approvals. Until policymakers can resolve this bottleneck, we risk worsening economic distortion among manufacturers, and consequential inefficiencies cascading through the value chain.

One significant step forward would be an effective pathway for follow-on biologics. This isn't lost on the president or key lawmakers, and it could have a profound effect across the entire industry, from drugmakers to consumers.

Sunday, March 8, 2009

It's the Same Risk

If there's ever a poster child for this recession it's Citigroup, down 97% from November 2007 – a massive $136 billion value collapse. Its current market capitalization of $5 billion is equal to that of the video game maker Electronic Arts (or one-fifth its original TARP injection).

Before offering up some toxic assets for Madden NFL 09, consider the following table (click to enlarge):



Sorted according to November 2007 market capitalization levels, it features the top ten TARP recipients, and, for fun, Lehman Brothers and Bear Stearns. At the recession's start, these 12 totaled over $1 trillion in value, which was 45% of the S&P financials sector. Then, the market valued Bank of America at more than twice the level of Goldman Sachs, which was 37% of the big five investment banks.

But as much as these stocks shrank, or disappeared, the decline paralleled that of the broader sector. Now, Goldman, at 66% of what's left of its brethren (that would be two including itself), is approaching B of A's shriveling size – times two.

What's more, the three largest institutions have increased their combined share of the S&P sector from 24% to 26%, with Wells Fargo and Goldman replacing Citi and B of A, and joining JP Morgan.

One of the most dangerous features about the financial sector at its peak was the extent of capital concentration: not only in assets, but also in its impact on market information. And while the deck is clearly reshuffling, the cards haven’t changed – at least not yet.

Perhaps this would have happened naturally, if not for government intervention. Perhaps Mr. Geithner is already crafting this goal into his grand design. Let's hope.

Friday, March 6, 2009

How Many More Days of Market Decline?

The daily stock market decline is something awful. Over the last 14 trading days (through March 5), the market closed down 12 times – a value drop of more than $1.2 trillion.

We have experienced worse value erosion, on three other occasions: October 2008, July 2002 and September 2001 ($2.5, 1.4 and 1.7 trillion, respectively).

And in percentage terms, let's hope we're not verging on the calamitous 30% October 1987 decline (most of it occurring in one day). The current decline is 17.5%.

How extreme is this daily routine? Consider the following histogram. It shows frequency of down days per continuous 14-day period, dating back to 1950. The average number of declining days over these 14,874 periods is 6.5, with a standard deviation of 1.98 – meaning that for any 14-day stretch there's a 68% probability we'll see 5 to 8 days of declines (rounding to whole numbers).



According to this analysis, our current condition is a less than 1% occurrence.

Could it continue? Yes. 2001, 1982, 1969, 1966, 1962, 1956, 1953, 1951, and the 1970s (except for three years) all had multiple 12 down-day periods.

Could it worsen? Possibly. In this nearly 60-year timeframe, we've never experienced 14 consecutive down days. However, there have been seven instances of 13 down days: June 1982, August 1982 (twice), August 1975 (twice), October 1971 and May 1956.

1971 witnessed the only 14-day stretch with no declines, but the total gain was a modest 3.6%.

Living as it seems we are in a period of manifold hundred-year events, we shouldn't rule out anything. Optimists, though, might take comfort in statistics that suggest we're due for a mean reversion to the upside.