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Now Is the Time to Invest in Health Care


The biotech conference showed signs of a good year.

The umpteenth annual JPMorgan Healthcare Conference is in the books. If attendance is indeed an accurate predictor of interest in the health-care sector, 2010 should be a great year. The conference hotel was packed and almost everyone I talked to had a crazy meeting schedule in one-on-ones scattered across the city.

If you follow the Buzz, you know that JP Morgan (JPM) CEO Jamie Dimon, former Medicare/Medicaid head Tom Scully, and former Senate Majority Leader Tom Daschle spoke to the attendees. Here's a summary of general thoughts from their talks and on the sector:

Health Care Isn't Reforming

Whatever we get from Congress between now and March is clearly a start, but it isn't reform in any important sense of the word -- particularly given the magnitude of the crisis. The House version is a little tougher on insurers with the inclusion of the public option, but even that effect would be years away (and unlikely to survive the conference process).

What's likely to come out of DC is perhaps the biggest make-work/profit plan for health-care insurers, hospitals, and drug companies ever devised by a national government in the history of the planet.

Hospitals will clearly, clearly benefit. Insurance companies will too, because any financial impact they might encounter will be more than made up by passing added costs on to consumers and a boost of new paying customers.

Tom Scully could identify only one clear loser from the reform (other than consumers) and that is the health-care insurance brokerage/agent industry. The exchanges will largely take their place. If you don't know this side of the health insurance business, well, think of what happened to the travel agent business after airline deregulation and the rise of sites like Expedia (EXPE). Same thing for health insurance brokers/agents.

Wait Until Next Term

There are study programs on comparative approvals, preventative care, and cost analysis worked into both the Senate and House versions. These are funded mandates, which we haven't seen a lot of before, so they will generate data. Look especially for House negotiators to be really aggressive about making sure these plans end up in the final version because they're unlikely to get much else from the conference process.

These programs will generate added data for lawmakers. Ignoring for a moment that the only data Congress typically uses is provided by lobbyists (usually in the form of campaign contributions), generating data on these three areas that will make a difference to cost control is an important first step.

These programs should be providing meaningful data by the next presidential inauguration in 2013. That means we'd expect the back half of this decade to see more chance of real "reform" than the first half.

The investment implication here is that it will be business as usual in the health-care sector -- only better. It's no surprise health-care stocks have been running this week. The rooms to hear Scully and Senator Daschle were packed, and health-care analysts (including my own firm) have been sounding the all clear for the sector for a month or so now.

I should note that the device sub-segment might be an exception to this. The sector is undergoing a reform in regulatory pathways inside the FDA that will reduce the number of "cowboy" approval decisions. Additionally, the health-care bill coming out of Congress could assess some pretty stiff fees on device makers. On the other hand, devices tend to have a pretty good economic profile (robotic surgery gizmos excepting), so they may benefit in the long run. That was certainly Scully's view.

Reform Is Necessary

This is important for long-term investors, particularly those who are interested in dev-stage biotech companies like me. Earlier-stage companies are probably five to 10 years away from market ramp for their products. So, it's important to understand what the sector will look like at that time.
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No positions in stocks mentioned.

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