Make no mistake, the goal is to squeeze some of the profits out of the industry and redistribute it to the public. And there is tremendous overcapacity in the health-care industry that has to get squeezed out. But whenever there is a radical restructuring of any industry, there are going to be winners and there are going to be losers. I think we’re at the point where we’re beginning to [identify] them.
I’ve owned Medco Containment for many years. Medco was started by a man named Marty Wygod, who is really one of the fathers of the competitive environment in health care. His mail-order prescription-drug company did about $25 million in about 1983; current sales are running at $2.5 billion. Medco negotiates with drug companies, buys in bulk and passes the savings on to clients like HMOs or Fortune 500 companies. Medco decides, say, to buy Tagamet, not Zantac [for ulcers]. The corporation will say, “We pay only for Tagamet.” Medco takes advantage of the fact that there is incredible overcapacity in the industry-lots of me-too products.
Well, you have to understand, pharmaceuticals have been the most profitable industry in the world. [Now] I think it’s finally hitting the thick heads of the industry executives … that me-too drugs are no the ’90s; the future is naturally occurring biologicals [developed from substances found in the human body]. During the next 12 months [we’ll] see a dramatic acceleration in buyouts or linkages between the drug companies and the biotech companies. American Cyanamid’s pending merger with Immunex is really a case study. Here’s a company spending hundreds of millions of dollars a year on R&D with very little to show [for it]. And here is Immunex, spending a fraction of that, with a whole pipeline of potentially blockbuster drugs.
Well, I took a very large position in Chiron, which [makes] beta-interferon. That’s a naturally occurring drug that, in studies, [has shown] dramatic reduction of symptoms of multiple sclerosis … and an actual reduction of the progression of the disease. This is one of those drugs where there is no therapeutic alternative. The drug would be priced at $5,000 to $7,000 a year, but these patients now spend an average of $15,000 a year on hospital costs. People that have the disease-300,000 in the United States alone-are clamoring for [it]. We are talking about potentially a billion-dollar drug-and there’s a whole line of breakthrough products in biotech. Also, I think we’ve seen the bottom [in stock prices].
Probably three quarters of these companies are speculative and scary. I’m getting an incredible number of phone calls from physicians who are … disgusted with their difficulty in successfully investing in the industry. They used to be able to treat someone with a new product, realize it was exciting and go out and buy [the stock]; they were on the front lines. Now Wall Street is a couple of steps ahead [or] has huge pools of capital that can pummel their stock.
The HMOs have been the leading edge of managed care. But the major function of an HMO is organizing health-care providers and payers. I think that’s going to be done by regional networks and hospitals. HMOs are either going to be folded into these networks, or they themselves will have to be buying hard assets. Also, [many] HMOs focus on commercial enrollment, Fortune 500 companies, younger, healthier people. They’re going to [have to] start taking in sicker people. Wall Street is fixated on potential enrollment growth, but I don’t know if it’s going to be good enrollment growth.
Some HMOs are structured differently. Companies like FHP and Coventry already own the assets: hospitals, doctors, they have the network. But all HMOs, even the most leading edge, are going to experience some deterioration in profit margins.
Health-care spending in the United States was $838 billion last year.It’s going to be over $900 billion this year. Clinton’s plan for the uninsured [will add to that]. Meanwhile, the population in the world is aging, and elderly people consume a disproportionate amount of health care, which just makes sense. A lot of people are projecting that health-care spending will decline to 10 percent of GNP [from 14 percent] within the next few years. I just don’t see it.
