The New York Times has a long and generally factual article about the impact of contributions from drug companies in the 2000 and 2002 elections, and it’s relation to the Medicare prescription drug coverage bills that are now in conference between the House and Senate. The industry, via its trade association PhRMA and in direct lobbying/contributions from individual companies, contributed $50 million in campaign contributions– almost all to Republicans–following the "Flo" TV commercials in 1999, which starred an old lady asking to "keep Big Government out of my medicine cabinet".
So with that anti-government stance, how come we have a prescription drug bill almost ready to be passed? Well the answer is that, like the AMA and AHA in the 1960’s, the industry has cut a medium term deal with the government. Given the costs of drugs to consumers, especially the elderly–and the near elderly "aging in" to Medicare by 2010–a government Rx program is inevitable at some stage. So PhRMA figured better one that has no price controls now, rather than one that comes with them immediately. Eventually, any government program that buys drugs will develop some type of budget restraint. But that can be left for future Congresses to pass and for future senior executive teams in the pharma industry to suffer through. After all, Medicare was introduced in 1965, and it took until 1983 before DRGs were introduced in a first attempt to restrain hospital costs. 19 years of an unrestrained government program with millions of new price-unconscious consumers probably looks good to the industry right now. OK, they won’t be that lucky, but you understand their position!
WebMD was and remains the most remarkable company of the eHealth era. It was remarkable for the incredible feeding frenzy it set off in the eHealth world when Healtheon bought the then privately held WebMD in 1999, making Jeff Arnold a very rich young man, and getting Jim Clark out of the business of competing with Microsoft (who were about to come after Healtheon using WebMD as a vehicle). The original concept of the end-to-end eHealth company that could do all the varied gazillions of transactions in health care by putting them all into the Internet "cloud" was a very seductive concept. However, as the bubble grew larger and larger, the decision to jump start the process by buying traditional health care IT companies like Medical Manager and Envoy (using the absurdly inflated stock of 1999 values) proved too tempting. Here’s a list of some of the companies they bought.
As soon as the acquisition spree took place, the old idea (catalogued by Michael Lewis who’s now off writing about baseball) of creating a "New, New" company was dead. Furthermore, all the internal machinations ended up costing way too much in organizational terms. When I was at i-Beacon we negotiated with 5 separate sets of WebMD/Healtheon employees to sell them a version of our consumer health record. It was a clusterf**k every time. This may be sour grapes but WebMD never got it together on those negotiations and instead 18 months later (after we were out of business) they ended paying $18m in 2002 cash for Wellmed and their health record. Nothing wrong with Wellmed’s but they could have had ours (or all of us) for much less in Yr2000 stock, methinks, and it would have been a tremendous product well before they paid to get Wellmed. (Wellmed had raised about $40m in Venture capital in 2000, and its investors were lucky to get some of their money back, given what happened to most eHealth companies).
WebMD meanwhile ended up being "reverse" taken-over by Marty Wygod of Medco fame — he was the one who’d originally bought Medical Manager. By the time he started running the show for real in 2001, Wygod essentially stripped it down to the three parts of claims processing (Envoy, MedEAmerica & Kinetra), medical software (Medical Manager) and consumer and doctor online (WebMD, Medscape, Wellmed & everything else). The first two parts made money, the last one never has (well it eked out a small profit last year but it lost $75m the year before). (WebMD also has a medical plastics business via Wygod’s old plastics company Synetics which it’s never got rid of). Revenue size-wise WebMD at Year end 2002 looks like this:
a) Transactions $466m
b) Medical software & services $275m
c) Portals $80m
d) Plastics $120m
Meanwhile the PE ratio–as of two days ago–is around 23 whereas those of other diversified medical technology and services companies like Cardinal Health (CAH) are closer to 18. So the web technology spin is still helping WebMD’s stock price even if it hasn’t really been helping transform health care the way we were promised by Jim Clark back in 1997.
The recent news is that something was fishy in the accounting at Medical Manager before Synetics bought it. Medical Manager itself was a merger of several regional medical office software companies, and had to restate its earnings (and nearly went under) in 1999. So yesterday (Sept 4) the FBI went into raid mode, and trading in WebMD stock was halted, opening today about 15% lower.
Is the raid and subpoenas a fuss about nothing, as the company says? More than likely as it’s about old news. But a serious restatement of earnings for just that sector of the business could be a big drag on the stock, and if it’s PE was at parity with Cardinal’s, the stock price should be closer to 8 rather than 10. This of course all serves to take WebMD even further away from being the dominant health care company technology of the 21st century that never was. And boy do we need one (or two or three….).
Today’s New York Times confirms what I said yesterday. Caremark is paying a bit too much for AdvancePCS, but is doing so to get into the Medicare scrum as in the NYT’s words "large drug benefit managers jockey for position in hopes of handling the potentially huge Medicare drug program that a House-Senate conference in Congress is drafting for 40 million elderly and disabled Americans." Meanwhile, Express Scripts shares have headed down to meet the percentage loss in Caremark’s since yesterday (Sept 3) morning’s deal, although there’s no clear reason why and ESRX already has a lower PE ratio than the other two. Caremark has gone down because a) they are paying too much (especially as they are debt-free and Advance still has $400m debt left over from its purchase of PCS a while ago) and b) they were growing revenues at 30% per year (and profits more so) and won’t be able to do that if they merge with as big a player as AdvancePCS — unless of course:
a) they convert many of Advance’s customers onto their mail-order pharmacy sooner than you’d expect, and/or
b) all PBMs get an amazing deal out of the Medicare Rx coverage negotiations. I’d say that’s unlikely unless the entire bill is held up and we get an even more Republican-leaning Senate in 2005 and they don’t notice that we have a eensy teensy problem with a thing called a deficit.
OK. My site is up and hopefully you are reading this by getting here via matthewholt.net or via thehealthcareblog.com, (or via .org and .net both of which get you here. (I describe the experience later when I’ve calmed down a bit). I have also fixed a way via bloglet of having you give your email address to get new postings emailed to you. I’m still figuring out whether it’s most useful for you to get, via email, the whole post, just the first few words as a teaser, or just the fact that there is a post. I’m also figuring out RSS and comments (and am nearly there with those). So please email me and let me know if you have any opinions about how you want to see this blog and what you want to see here. Thanks and please keep coming back. Matthew
For serveral weeks the odd rumor that PBM Caremark was going to buy AdvancePCS showed up in the Yahoo ADVP message board. While you shouldn’t usually trust what those boards say, this time they were right. Caremark announced a roughly $5 billion agreed bid for AdvancePCS, which sent Advance stock up from $40 to $47 and Caremark’s down from $24 to $22. On the face of it, with a newly freed Medco the big gorilla in the marketplace, this is a decent consolidation move. Caremark is stronger in mail-order and more profitable, AdvancePCS has more lives, especialy in the health plan world, and has probably made a little more progress in the eHealth and DSM world. However, the price thay are paying is some 35% higher than AdvancePCS has ever traded on the open market, which is quite a premium — hence the decline in Caremark’s stock. Longer term it leaves three big PBM players for whatever role for PBMs comes out of the Medicare Rx bill, now in negotiations between the house and the Senate.
Welcome back from the Labor day break. I’m still working on re-establishing my site, so please keep your browser pointed at thehealthcareblog.com and in the meantime I’ll keep posting! When it’s safe to go back to matthewholt.net I’ll let you know here!
So a funny thing has been happening in the small and medium cap Biotech market. (And by that I’m lumping in virtually any company that is developing pharma products but doesn’t sell them yet). After getting somewhat swept up in the dotcom fever of 1999 and early 2000. Biotech’s woes grew over the next two years, and by the time of the Iraq war several small biotech companies were selling for close to the value of their cash on hand. Now the Burrils Biotech Indicies have all shot skywards for this year. In particular their Select biotech index is up over 55% (to end July) compared to the NASDAQ’s 33% improvement so far in 2003. The small cap biotech market which tracked by the Burrils index was 84 at the end of 2002 and fell to 68 (down 18%) by the end of February as war loomed. It was 113 at the end of July, up 34% on the year and up roughly 66% since its war-induced lows. Finally we are beginning to see possible signs of life in the Biotech IPO market. For instance Cancervax filed for an IPO in mid-July, albeit selling some insurance stock to current investors in case it doesn’t get out the door.
This tells you a couple of things. Given that the science hasn’t changed too much in 7 short months, this market remains very, very volatile. After all , we’re talking about a market for drugs that usually have several years of testing to go through before they are ready for the nod from the FDA. But it also tells you that at least some investors believe that there will be a market for these new and usually very expensive drugs in the medium-term future. So while the major pharmaceutical companies continue to have their problems, the pipeline of new biotech offerings looks to be in good enough financial shape that the rest of the healthcare system will be getting the benefits, and of course the costs, of these drugs in years to come!
And in the interests of full disclosure, I own stock in one small-cap biotech company Pain Therapeutics (PTIE). I just wish I’d bought a hell of a lot more back in March!
I have had a very bad experience with domain theft from a terrible company called primesource-hosting.com. So until I can get my domain back, the blog will appear here. This should be sorted out in a week or so. Please keep coming back! Matthew
So the NYT reports today that the Medicare bill compromise discussions between the teams from the house and the senate are being held up by a dispute on payments to rural hospitals. A dispute between different republicans! (Bill Thomas in the House and Chuck Grassley in the Senate). This bill is supposed to be about getting prescription drugs to seniors, but instead is getting bogged down in electoral politics. So don’t expect any news any time soon, because the Democrats haven’t even put their oar in yet concerning the ‘ "privatization" of Medicare’ part of the House bill. And they certainly don’t want the Republicans to be able to run on "we gave seniors drug coverage" for 2004.
In the midst of the e-health boom, there were a huge raft of companies hoping to profit from e-prescribing and e-detailing, and there were some very odd business plans about how to pay doctors to receive these "e-details". Well some recent research seems to be indicating that this is starting to take off. Manhattan Research’s ePhysician service (the old CyberDialogue) reports that 50% of doctors seeing more than 50 patients a week and writing more than 50 Rx a week, use or want to use e-detailing, eCME, a PDA or online Rx information–in other words are ripe for e-detailing and interested in e-prescribing. Jupiter reports that of those doctors who use the Internet at least once a week for work (which is most of them) 58% have taken part in at least one e-Detailing session. And of course 85% said that they’d use it more if they got paid to use it. In a related data byte, Harris Interactive reported back in April that by the end of 2002 16% of doctors were using online prescribing and another 21% plan to use it within 18 months.
So the argument I was making back in 1998 and 1999 seems to be coming to pass–the use of information tools by doctors is starting in this country (even if it lags behind those rates of adoption abroad). There’s now a sizable minority using more than just a pen. Partly in response to that Pharma companies are now getting very interested in e-detailing, mostly because they want to cut the costs of sending the nice detail people out to hassle the doctors. So perhaps those odd business plans weren’t so odd.
Looks like the PBM stocks are now taking a downward move . Express Scripts’ stock (ESRX) is under pressure partly following some comments from a short-seller in Barrons. Meanwhile, Medco (MHS)continues upwards. Some of this is probably caused by institutions re-allocating their PBM portfolio. Medco has added about a billion in market cap since it started trading last week, and is now finally worth a little more than what Merck paid for it back in 1994–not bad when you condsider that PCS (ADVP) has still not come close to being worth the $4 billion Eli Lilly paid McKesson for it back then!