Health Care Austerity

A wave of austerity has swept across the globe as debt markets no longer want to fund ever increasing government deficits. I believe that the austerity trend is here to stay. One of the first things that every country undergoing austerity has done was to cut the amount they pay for drugs to bio-pharma companies.

Bio-pharma companies are easy targets as there is no love lost between them and the public. The knee jerk reaction is to think "good for them, those crooks deserve it". But looking at the facts might yield a different conclusion.

The bio-pharma industry has been consolidating as the low hanging fruits have been picked and finding new drugs is extremely costly. R&D costs have been rising and new blockbuster drugs have been few and far between. Companies like Pfizer have wasted tens of billions of dollars on R&D with little to show for it. There are far  fewer biotech and pharma companies than there were 3, 5 and 10 years ago. If companies are paid less for new drugs than there will be even less R&D and fewer new drugs.

While I believe this is the wrong place to cut costs, I see the writing on the wall. Many bio-pharma companies are cheap enough that further price cuts are more than priced in. But when the time comes that more austerity measures are announced the stocks will likely not react kindly, especially when it happens in the US.

I have drastically cut my exposure to bio-pharma companies for the reasons cited above and because my largest holding, Gilead, had reached my target. I still believe the sector is attractively priced and still hold some positions but the dangers of austerity are large enough that I don't want as large an overweight in the sector.

6 comments:

ECasdin said...

Some large part of me thinks you are bobbing when you should be weaving on this one. Productivity of R&D is the key issue. If there is a change in it (i.e. it gets better) then these companies will see multiple expansion not contraction.

nicasurfer said...

healthy put buying today the first time in weeks

Tsachy Mishal said...

The R&D productivity is not what bothers me. Its the unknown of when more countries will decide to pay less for drugs. It will happen and it will happen in this country. Social security and healthcare costs are about to skyrocket and the bond vigilantes will be knocking on our door soon.

I am still long the sector, just not as aggressively.

ECasdin said...

Good luck on limiting access in the U.S. It seems hard to fathom that an elected official would ever deny access to a voter. Not the solution.

What needs to be done is to improve outcomes and reduce waste. That can be address through the application of technology.

Tsachy Mishal said...

Its not about limiting access. Many European countries simply told the bio-pharma companies they are paying them less. Better yet, a lot are paying these lower prices with IOUs. Right now the US government does not even negotiate prices with drug companies.

Tsachy Mishal said...

You are right about the way things should work with technology. But how things should be and how they actually are often differs.