How Obamacare Could Kill Your Kids, and Their Kids Too

Townhall.com ^ | April 24, 2014 | John Ransom

[Kaslin]

Success in the biotech industry is measured incrementally, not in big steps. It’s a cash-and-time intensive industry where success is painstaking, rare and, because of Obamacare and other regulatory burdens from the administration, likely to become even rarer, as the Valeant, Allergan battle shows.

According to Plunkett Research, Ltd in 2010 it cost $1.2 billion to develop each and every biologic drug. That’s because while the government currently tracks 124,932 trials for new drug application in 179 foreign countries, only a tiny fraction of those drugs will ever see the marketplace. In the United States, for example, there were only about 114 FDA approvals for new drugs last year.That’s a success rate of 0.091256. If that were a batting average for a baseball player, it would belong to a player who would never see the minor leagues, yet alone the Biggies.

"That means that enormous fortunes are going to be made in the sector," Jonathon Lach, CEO of BlueStar Capital Management, a biotech hedge fund headquartered in Westport, Connecticut told me in 2006. He pointed out, however, that the industry’s staggering failure rate makes some other long-odds stock market sectors look like safe bets in comparison. "Conversely, that means that enormous fortunes will also be lost in the sector."

But under the greatest capital markets in the history of the world, biotechnology has thrived. despite the long odds, because the enormous profit potential has attracted quite a bit of capital over the last 25 years.

That might be changing however.

In wake of the Allergan deal, some worry that it’s an indication that the pipeline of new drug discoveries is drying up.

Allergan is being targeted by investor Bill Ackman and Valeant in a hostile takeover bid.

“Most drugmakers have since seen revenue flatline or even dip as a tidal wave of cheaper generic competition to former blockbuster pills over the past few years wiped out billions of dollars in annual revenue,” says CNBC.

“At the same time, research to develop new medicines to replace lost income is ever more difficult and expensive. Mergers and acquisitions give them additional sources of revenue and new ways to cut costs and become more efficient while they wait for drugs in their research pipeline to win approval.”

25 years ago there were roughly 700 biotech companies. Now, worldwide there are 3853 companies with about half of those concentrated in the United States. U.S. companies account for about 75 percent of all revenues in biotech.

The combination of free markets and efficient capital markets compared to other countries has so far allowed the Unites States to lead the way despite some bumps and bruises along the way. Market crashes, like the ones experienced in 1987 and 2008 make even viable biotech companies with a good pipeline of drugs hard to finance because they always need money.

Research and Development expenditures for new drug application in 2010 totaled $67.4 billion, according to Plunkett, in an industry that generated of about $81 billion in total revenues. That’s because biotech companies typically generate little revenue. Instead the companies rely on the stock markets to fund R&D. Then they usually sell out their discoveries to large pharmaceutical companies once they have successfully brought a drug to market, because biotechs are in the business of new research, not in the business of the distribution of new medicines. But, just like a wildcatter staking an oil claim, the profits are large for investors willing to be patient and work hard.

Lach once told me that investors who were willing to work hard to bring scientific insight into their investment model would necessarily do better than average.

But under Obamacare, and the other regulatory burdens on banking and investment, biotech will have a much harder time. In a quest to drive down costs in healthcare, there will be little tolerance for big profits, big losses or new discoveries in medicine under Obama’s prescription for single payer coverage for the entire universe.

And that could be driving the current merger wave in the industry. While mergers can be a sign of good value out there, in this case, it looks to be a sign of slowing revenues and slowing drug discovery.

Most other countries already operate under a system of nationalized healthcare and restricted capital markets.

According to Indicium Data, LLC, a company that tracks biotechnology capital market trends, of the $6 billion in capital financings that happened worldwide for biotech in 2011 about $4.8 billion was raised in the United States. Twice as many dollars were raised in California and Massachusetts alone compared to the entire rest of the world. Of the 281 financings in biotech that happened worldwide, 211 of them happened in the US in 2011.

Experience from other countries has taught us that investors won’t continue to pour money into medical innovation when the incentive for innovation has disappeared.

Other countries like Australia can’t even raise a dime for biotech companies in capital markets.

It would be shame if the wonder drugs we rely on to help the elderly, the sick and our children stopped working wonders because a parochial and partisan prejudice against profits by liberals was allowed to outweigh the greater good.

[4Liberty]

Bump!

[CitizenUSA]

There’s no such thing as a free ride. This is a generally true statement, and those who currently applaud Obamacare because they think they’re getting something free (or heavily subsidized) will learn that socialism is like a bitter poison. It’s all about the dose, and Obamacare is a very large dose of poison indeed. So some people will and are benefiting from Obamacare, but many, many more are going to suffer for it, in ways we can’t even predict at this point.

[Texas resident]

My thinking is that no only cutting edge medicines will be stopped in their tracks, but common medications will become hard to come by. Unless you are a loyal obamabot.

[Psalm 144]

I agree with you. There will be no point in developing them. The only way out I see is a niche medical market and providers offshore. Cayman Islands or something. Even Mexico.

This is going to explode eventually however, when someone loses a spouse or child to these artificial obstacles to care.

[CitizenUSA]

I think surveys show most people like socialized medicine in those countries where it’s tried. That’s not surprising, because socialism hides the true cost of things. Some people do get more than they put in of course, and that makes them both dependent and loyal to whoever keeps the freebies coming. Others will pay far, far more and receive much less than they would have had otherwise. The costs aren’t simply financial as this article shows. Who knows what sort of medical innovations simply won’t be done because there’s no profit in it.

Socialized medicine also works well if one is generally young and healthy. Break your arm? You’ll get it set for free, and that seems like a wonderful deal. What these people seemingly don’t understand is that free health care isn’t going to be there for you if you truly need it. If you develop a serious chronic illness that costs too much to treat, you’re not likely to receive much more than palliative care, i.e. pain killers to mask the problem until you die. If you’re lucky, you might survive the long wait to get an expensive procedure.

I dare say the profit motive is moral, and people deserve to be rewarded for their efforts! Removing the profit motive from medicine does not mean more people will get a bigger share. It means some people get a small piece free, while everyone else pays more for a shrinking share.

[exDemMom]

Thank you for posting this.

Even here on FR, which is supposedly a conservative site, I see way too many people decry the gross profits of pharmaceuticals, while completely disregarding the huge costs of bringing a new drug to market.

As a medical researcher, I can envision the research funds drying up. There is not much need for new drugs or therapies when the socialized medicine model is based on preventive care and repair of minor ailments, while letting the truly sick die.