Jenks Healthcare Business Report December 2001

In the December 2001 issue:

Health care will have a strong year in 2002, but if the lawyers and lobbyists take over the direction of the industry, big problems will arise. Health care will always be big business and profits are necessary, but watch out for unwelcome change.
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Public Equity Market

Five new health care IPOs are priced, but with mixed results.
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Venture Capital Market

Another big month for health care companies in the venture capital market. Deals ranged from $2.5 million to $65 million. The private equity market was also strong with 10 new deals announced.
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Acquisition Market

Shades of 1996-1997? There were four deals worth more than $1 billion each announced in the past month, with Amgen’s $16 billion deal topping them all. It looks like 2002 will be a busy year in the M&A market.
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Jenks Healthcare Business Report

Of Lawyers, Legislation and Loopholes: Welcome Health Care 2002

A few months ago, we wrote that health care may be the engine that drives the economy out of the current recession. It is certainly preferable to Osama bin Laden and a "war" economy, but health care as an economic force has its own problems. Many economists believe that health care spending actually hurts economic growth since health itself does not produce anything. This may be true, but it also ignores the fact that healthier people are more productive in the workplace. Think of surgical procedures that 20 years ago took someone out of the workforce for days or weeks that now simply involve outpatient care. The technology is more expensive, but the productivity of the worker rises.

When we look at the business of health care, it is often easy to forget about who health care is for. If Bill Clinton were running for president today, the answer would be, It’s the consumer, stupid. With some of the recent headlines, however, it may seem that health care is for the lawyers and the healthy.

A case in point is the battle line currently being drawn between the generic drug companies and the large pharmaceutical companies, such as Bristol-Myers Squibb (NYSE: BMY) and Merck (NYSE: MRK). Few people dispute the need for patent protection to encourage the development of new life-saving drugs. For every blockbuster drug, there are dozens that we never hear of because they either do not come to market or serve too small a population for the average consumer (or editor) to take notice.

Most consumers understand that without profit, the incentive to risk millions of dollars to "invent" a new life-saving drug that may or may not work would be too small to attract sufficient and continual capital. The alternative would be government-run labs, which would probably result in a decrease in our life expectancy in a relatively short period of time. But the consumer understands when greed gets excessive, and if it becomes too obvious, even our legislators may notice.

The current Glucophage saga is something that should never have happened and may have a long-term negative impact on the pharmaceutical industry (excluding the generic companies). One of Bristol-Myers Squibb’s top selling drugs with more than $1.5 billion in annual sales, Glucophage is a drug that was never developed by BMY and has been used in its generic form outside the U.S. for decades in treating diabetes.

All BMY did was bring the drug through the U.S. regulatory process, for which it won exclusive rights to sell its version of an old drug in this country. While not an easy task, there was little if any risk since the drug was already proven to help in the treatment of diabetes. Let’s face it, this wasn’t Captain Kirk exploring uncharted galaxies.

But the big pharmaceutical company believes it has certain rights, or at least its lawyers do, and it went to unusual lengths to prevent up to a dozen generic companies from bringing their products to market. Many companies delay the competition from generics by undertaking tests of a drug’s effect on children. This usually buys six additional months of protection. But BMY was trying to combine, to its benefit, a 1984 law that extends a drug’s patent protection by three years for any new indication it adds to the drug with a 1994 FDA rule that requires drug companies to put information on the labels whether a drug is safe for children. So if the company is the exclusive marketer of the drug to children, but the generics can’t put proper pediatric labeling on their versions, then BMY would have exclusive marketing rights to both children and adults for another three years. Fortunately, people cried foul, but it is the attempt to maintain the monopoly for a drug it neither discovered, nor risked much capital for, that will hurt the industry’s reputation in the long term, no matter how much is spent by their lobbyists.

The lobbyists have earned their fees, however, with votes of 41-6 in the House Energy and Commerce Committee in October (338-86 in the full House in November) to renew a program approved by Congress in 1997 to encourage research on the effect of certain drugs on children. The issue is, At what cost? No one wants to "vote against children," but for every day that a generic is kept off the market, the number of people unable to afford the name-brand drugs grows.

Managed care companies like to blame the back-to-back double digit increases in health insurance premiums on the cost of prescription drugs and the increase in their use. It is an easy target, for obvious reasons, but not the full story. Drug companies, however, are already being targeted by state Medicaid programs for volume discounts, and other price pressures are bound to increase. When big pharma seeks help, however, tactics such as those used by BMY will slowly erode any support they may have in Washington, despite the financial clout of the lobbyists.

And speaking of managed care companies, are they in for yet another public relations backlash with a new health plan that appears to place more of the financial burden on the shoulders of the ones that spend the most money - the chronically ill? Is it fair? Certainly not to the sick, but the young and healthy population will applaud it, until that is, they become older or develop some sort of chronic illness. Pharmaceutical costs will be in the limelight again, because it looks as if big prescription drug users will be paying more out-of-pocket than with past plans. The good news is that health plan premiums would decline, but that is only one part of the cost equation. The health "spending allowance" of $2,000 to $3,000 per year resembles a medical savings account, but without the tax benefits and ability to accumulate funds in the account.

At first blush, the new plans seem to benefit the healthy and wealthy, but would create an entirely new class of the underinsured who do not have the financial wherewithal to pick up an extra $1,000 to $2,000 of out-of-pocket health care expenses to bridge the gap between the allowance and the deductible. The historical goal of spreading the high cost of big users of health care among a larger pool of enrollees seems to be losing its appeal, at least among large corporate buyers of insurance and the managed care companies themselves. There is little question that insurers should encourage, through financial incentives, the use of generics, especially if that really is where the cost pressures are. But if the insurance industry is not careful, we may be seeing Round 2 of HillaryCare, except this time she’s actually an elected official.

Read the past headlines.