Grim Prognosis for Ailing Health Care Market ... As Seen Through the Eyes of Emerging Drug Companies

For individuals or companies attempting to bring new drugs onto the market, the last few years have been extremely challenging; much like real estate, the market practically came to a standstill in 2009.   David Fitzsimons of tPF recently learned this and more at a conference hosted by OneMedForum in New York City at the Roosevelt Hotel on June 24.  In fact, he had also attended a ThinkEquity conference in NYC several weeks back where he sat and listened as one drug start-up after another got up and presented to other presenters.   David doesn't hold out great hope that there will be future conferences like this because if the presenters took some notes, they realized they spent a lot of money to present to other presenters and a handful of analysts.  Unless they are completely jaded at this point, they are probably licking their wounds over a lousy ROI on the respective conferences.

But whether the speakers were happy with their ROI or not, we were happy to learn how the emerging drug/medical device industry is faring these days, particularly within the context of the Affordable Care Act.  Here are some of the highlights:

• If we elect a Republican President and/or there is a continued shift in the House and Senate toward Republicanism (and conservative Democracy), we won't have the coverage expansion foreseen by the authors of the Affordable Care Act (which is ironic, since this is what drove the whole Act in the first place); this and other features of the Act will be curtailed or eliminated 2014.
• Irrespective of changes in seats vis a vis Republicans and Democrats, we will see serious deficit reduction legislation by year-end; and we should anticipate like legislation on an every-other-year basis for the next 5-10 years until the deficit is safely under control; this is a laudable bi-partisan initiative.
• All government funding -- Federal, state, county and local -- is imperiled at this point, which means hospitals in local markets need cash.   As a result of this, Medicaid cuts and other factors, there will be a lot more hospital closures nationwide in the coming years.
• Length of stay rates are getting lower and lower as the population continues to age and more and more of the sick population finds its way into nursing homes and home health agencies.  (Home health agencies are a good investment play.)
• Retention of patient records or "EHR" is a huge proposition at this point.  When St. Vincent's Hospital in NYC closed last year, it left behind 300,000 cubic feet of records.  The problem is that there is absolutely no standardization in the EHR world; everyone has their medical records formatted differently.  At last count there were 250 health systems and 250 health information systems.  Interestingly, one of the speakers pointed out the Federal government is loathe to dictate a particular standard, just as we recently found out with High Definition television.  The Federal government prefers to let market forces make these decisions.  For many years, the Federal government has left the US health care delivery system at the mercy of market forces.  Sure, we had Federal programs like ERISA, COBRA, and FSAs, but these didn't really conflict with market forces.  If anything, these were superficial programs that strengthened participants' rights under market-driven medical plans.  So the Federal government's emphasis on EHR (without a prevailing standard) as a central element in the Affordable Care Act is surely an overreach.  The market will go after and achieve a standard, but no one is quite sure when that will happen, and if does, whether it will line up with the EHR documentation requirements drafted into the ACA.  Again, besides driving the standard, the company that invests heavily in this area and gobbles up all the smaller EHR vendors will end up in an enviable equity/growth position.
• A venture capitalist is urging emerging companies to "get back to basics."  He  cautioned against betting on the Affordable Care Act since "we don't know what areas will be supported -- we are dealing with a lot of regulations and politics."  The ideal, he added, is to find yourself into a subsector where there is low supply and high or increasing demand.  A good venture capital project in a stable credit market will see an ROI of 600% - 700%.
• In the medical device area, the cost of development continues to rise (despite the availability of inexpensive capital) and the small emerging players aren't even able to sit at the table since they need current revenue of $40-$50M to get funding from commercial banks (that's the ante the Deutsche Bank representative behind the dais is currently requiring of investors).  This does not bode well for medical device innovation, or the affordability of any medical devices that do ultimately hit the market since we have monopolies (at the sub-sector level at a minimum) in the making with this kind of start-up threshold.  In addition, medical device innovators do not see the increased volume making up for the excise tax included in the Affordable Care Act.  As a result, there is a great deal of lobbying currently underway to have the excise tax eliminated because it seems like there are enough barriers to market entry without having to include a financial ball and chain for those lucky few medical device products that do make it to market.

This conference was extremely thought provocative, a telling look at the different ways that private and public enterprise continue to clash.  And in the middle of all this, a few people are desperately trying to figure out how to make some decent money.   With this government, it is not going to be easy.