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TMFHelical (98.76)

The trouble with medical diagnostics.

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October 29, 2007 – Comments (1)

Over a week back I did an ETF teardown in my blog on HHD (Healthshares Diagnostics).  I am bearish on this ETF largely due to its design, but bullish on medical diagnostics in general.  The ETF has done quite well of late, in large part due to buyout offers on a few of its holdings.

 

So I want to expand on this market segment in my blog over the next couple of weeks, particularly the companies I made selections.  But first, along with the assessment I offered: "While I believe that medical diagnostics will be a major revolution in the next 10 - 20 years, that doesn't mean that it makes for a good investment."  So I think it prudent to do a commentary on the risks inherent in the field and the trends that may or may not play out. There are a few.

 

Let's start with some positive driving forces in the industry.  Demographics is the obvious one, the population is getting older.  But powerfully alongside that is the growth in the information age, so these aging boomers are more health conscious and more enabled in their healthcare choices and options.  Alvin Toffler included physicians / doctors as one of his 'sources of truth' that is challenged by the information age - the days of simply following doctor's orders because he/she knows best are gone or at least vanishing.  Diagnostics should expand due to customers / patients becoming aware of tests available and asking for them.

 

Second is the FDA.  In a 2004 whitepaper as part of its 'critical path initiative', the FDA laid out some areas of research they believed could grease the wheels of the pharmaceutical market.  Among them was increased use of imaging and diagnostics.

 "Opportunity: "The appearance of new quantitative measuring technologies absolutely galvanizes new drug research." Additional biomarkers (quantitative measures of biological effects that provide informative links between mechanism of action and clinical effectiveness) and additional surrogate markers (quantitative measures that can predict effectiveness) are needed to guide product development." 

The whole document is a good read for trend spotters in my opinion and should not be ignored by those in the industry.  I should note that Andy Kessler was critical of this document in his book "The End of Medicine" (also a great read).  He expressed disappointment that the document focused only on 'clinical' diagnostics rather than 'preventive' investigations, effectively saying that the FDA again gave in to pharma lobbying to have everything oriented toward drug approvals.  To be fair, this should be what the FDA focuses on, but he did make good points that it is a shame there is not more of a 'disease prevention' vs. 'disease treatment' mindset.

 

With all that framed, we come to the big hurdle in medical diagnostics.  An often underconsidered issue in healthcare products and services.  Reimbursement Risk!  We expect our insurance providers to pay for out healthcare, after all, the insurance is awfully expensive.  But they don't and can't cover everything.  Whether or not a drug or service is approved doesn't mean it is reimbursable - and let's face it, consumers are just not the market for drugs and test - insurance companies are!  If I have a $1000 test for whatever, I need to convince the insurance company that it is worthwhile and should be covered.  I can market to consumers, but they are reluctant to pull out a checkbook and pay for uncovered items (aside: I would argue that marketing to consumers is a good way to get insurance companies to cover it - the 'I Want My MTV' model).  I've blogged about Agendia and their breast cancer aggressiveness diagnostic array.  They are currently facing issues of slow market adoption because they struggle to convince insurance companies to cover it.  Insurance companies are hesitant to direct money to anything that doesn't specifically indicate a defined 'treatment' regimen.

 

We can go on more about insurance later (we really should), but the bottom line is that reimbursement risk is a dominating issue … no make that roadblock, for the medical diagnostics industry.

 

I am still bullish on diagnostics.  The industry has to change and will.  I buy into what Paul Zane Pilzner had to say in 'The New Health Insurance Solution'.  We will have individual policies (paid for but not provided by employers).  It will make more use of things like HSA's which means that we as consumers will have more say in the direction of our 'discretionary' health care dollars.  And….I believe that more of us will choose to direct those discretionary dollars to disease prevention and diagnostics.  We will do more imaging like Petscans, and more detailed blood tests / disease progression analyses.  We will want to know first, and then discuss options with our doctors.  We are empowered by information, and it will be true in healthcare as it is in other fields - just gonna take some time to tear down the existing walls.

 

Ralph (Zz)

1 Comments – Post Your Own

#1) On November 02, 2007 at 5:40 PM, zygnoda (27.17) wrote:

Hi,

Just wanted to say thanks for the info.  I have noticed the emphasis on cash flows in many of the articles.  It seems like a good approach.  Unlike some of the crazy practices enron used.

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