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  Announcements

Earlier this year, Jamie Dimon, Warren Buffett and Jeff Bezos - representing their companies JPMorgan, Berkshire Hathaway and Amazon respectively - gave a press release stating that they were working together to figure out how to reduce healthcare costs. In their statement it was expressed that ballooning healthcare prices are hurting the US economy and that they do not accept this as an inevitable fate. Instead they are seeking to create technology to simplify the health care system and give greater transparency. The program appears to be initially for their own employees, who are more than a million strong globally, but they gave no indication of this spreading to other employers. Interestingly though, they suggested that the initiative would be, “free from profit-making incentives and constraints,” and such righteous motives might suggest that if such a program truly works it would become accessible to all. Immediately following the announcement shares of health insurance companies like Anthem, Aetna, and United Healthcare plunged.

It would seem Amazon will be leading the charge in development given its prowess in technology and its interest in entering the medical supply industry. It has been a long time coming for Amazon to move into the pharmacy and healthcare supply space, and they want to create a new marketplace that is easier to use. However, it is not just these companies looking to disrupt health care, with Apple, Alphabet and Uber all looking to enter the space in their own way. Though there is a lot of power and innovation behind these companies, it would seem many are betting against their ability to dominate the system due to the heavy regulations that exist in the industry. As previously mentioned, Amazon would have much to gain from becoming a bigger player in healthcare, yet there are countless challenges to be faced from the FDA to the drug manufacturers, health insurers, and the actual customers.

It is without a doubt that the healthcare industry is ripe for disruption and change. Technology has grown to a point where we can wear devices that constantly monitor our state, and possibly give certain diagnoses. This type of technology focuses on preventive care, which has been the concentration of both Alphabet and Apple. Yet, what Amazon along with JP and Berkshire Hathaway can potentially create is a system where such medical devices give feedback to the platform and automatically order the correct medical supplies needed.

Many companies are now looking for ways to reduce the amount they are spending on coverage for their employees. Premiums have skyrocketed, but little change has been made in the face of a tight labor market and fear of upsetting employees with cuts to their benefits. This has caused margins to fall, so it is a good sign to see companies looking to finally change the direction of how they cover their employees. It is still too early to make any recommendations on how to react to the news coming from Amazon, JPMorgan and BH, but it will be important to keep any eye on how companies across the nation continue to deal with rising health care costs going forward.

 

Current Status of Healthcare.

Healthcare spending grew by 4.3% in 2016 to $3.3T, and according the projected NHE data spending growth will rise to an average 5.5% y/y from 2017-2026. This would mean a total of $5.7T spent on healthcare annually, about a quarter of the current US GDP.

- all values are Y/Y % -

 

Drugs

This includes pharmaceuticals and biotech firms. Biotech firms are mostly R&D, and seek to create new drugs and equipment to further improve patients health, typically in non-invasive ways. Pharmaceuticals also engage in some R&D, but for the most part focus their efforts on manufacturing of drugs and the marketing of them.

Johnson & Johnson (JNJ) is (+3.90%)

Phizer (PFE) is (+5.22%)

Novartis AG (NVS) is (+9.29%)

Generic drug makers however have seen huge slumps as the largest drug wholesalers are competing for pharmacy contracts, typically agreeing to cut prices which have greatly eaten into profits of drug manufacturers. Teva Pharma is down ~46% Y/Y , Mylan is dow ~1.5% Y/Y

 

Medical Equipment and Supplies

Healthcare equipment companies are the ones who manufacture and supply hospitals with everything from scalpels, gloves, MRI machines and robotic surgery apparatuses. They produce the most common of medical devices to the most bleeding edge tech healthcare has to offer.

Medtronic PLC (MDT) is (-1.75%)

Becton, Dickinson and Company (BDX) is (+19.63%)

Stryker Corporation (SYK) is (+21.38%)

The medical device industry has become increasingly competitive, while it has also become more difficult to overcome FDA regulations. There is an ever widening disparity between Class I medical devices coming to market (those that are considered of lowest risk) and Class III devices (of the highest risk), which may point to signs that innovation in the industry is stumbling. As regulations tighten companies have to think about the cost and time associated with getting high risk devices to market through a more challenging pathway like a PMA (Premarket Approval). In light of these challenges the FDA has committed itself to streamlining application processes, and in recent years have exempted hundreds of devices from having to submit 510(k)s. Beyond this, the FDA recognizes that their rigorous regulations have dissuaded manufacturers from bringing devices to the US market early and has stunted innovation. The FDA’s 2020 strategic priorities seek to change much of this and is a great sign for the medical device industry going forward.

 

Managed Healthcare

Those organizations that fall under this industry seek to reduce the cost of healthcare provided to patients while ever improving the quality of healthcare that they receive. The major health insurers that fall under this industry usually focus on preventive care for patients, and subscribe their policies to promote this.

United Health Group (UNH) is (+33.40%)

Anthem (ANTH) is (+35.78%)

Aetna (AET) is (+32.48%)

 

Healthcare Facilities

These are the physical locations that provide some form of healthcare service, such as hospitals, labs, nursing homes, dental offices, and psychiatric facilities.

HCP Inc. (HCP) is (-26.04%)

Omega Healthcare Investors (OHI) is (-16.96%)

Sabra Healthcare REIT (SBRA) is (-37.5%)

Rising interests rates are cutting into margins as it is becoming more expensive to finance purchases with debt. Cuts into cash flow are growing to cover interest payments and profits are falling steadily.

 

References

https://www.businesswire.com/news/home/20180130005676/en/Amazon-Berkshire-Hathaway-JPMorgan-Chase-partner-U.S.

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/NHE-Presentation-Slides.pdf

https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf

https://www.vox.com/technology/2018/3/6/17071750/amazon-health-care-apple-google-uber

https://www.odtmag.com/issues/2018-02-01/view_columns/the-impact-of-us-regulation-on-medical-device-innovation/48587

https://www.fda.gov/downloads/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDRH/CDRHVisionandMission/UCM592693.pdf

https://www.wsj.com/articles/falling-u-s-generic-drug-prices-hurt-manufacturers-wholesalers-1501877062





 


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