Monday, January 11, 2016

First Insights From JP Morgan Healthcare Conference 2016

The JP Morgan Healthcare Conference 2016 is happening all this week here in San Francisco. I could not get access to the main conference, so whoever was supposed to confirm me for front-row VIP seating must have really messed up. Seriously, I'm not as much of a die-hard healthcare fan as the other attendees. There's a lot for me to learn by attending the adjunct events. I've picked up a few insights already, straight from the boardroom.

All of the investment bank and private equity people I've seen here so far are in the top 5% of the population in physical looks. This observation holds for both genders. They were hired partly for their looks and pedigrees because those are markers of superior breeding that attract clients and intimidate rivals. One private equity woman sitting near me at an event carried a very showy handbag. I searched the bag's brand online and it cost over $2000 retail. Elite brands may impress people whose upbringing taught them that throwing away money is a sign of success. I just think it's a sign of stupidity to pay two grand for something when a $50 Wal-Mart knockoff gets the job done. Any financial professional who is that irresponsible with their own money is probably even less considerate when handling someone else's money.

Enhancing primary care with "digital health" is a big trend. Information density will increase as more hospitals and HMOs want systems that track patient care history. Patients with chronic ailments have more touch points and will have denser data records. Such detailed use cases will be the reference lodestones as insurers seek ways to reduce costs in their most expensive populations. I bet behavioral finance concepts adapt to healthcare consumption, just like analytics can adapt across sectors. Large data sets on how patients use drugs and devices will make delivery more effective.

I am beginning to understand the healthcare value chain. The chains for both drugs and devices should theoretically be quite simple, running from manufacturer to distributor (i.e., hospitals and pharmacies) to user. Nothing in life is ever so simple. The wrinkle comes from the distinction between users and final payers, who are not the same thanks to insurance coverage and government spending. Insurers have grown accustomed to Medicare and Medicaid reimbursement policies. The Affordable Care Act's complexities are making business untenable for some insurers. The final detonation of government mandates for collective health care payments will severely disrupt the heath care value chain in the next few years. The return of user payments for small services and traditional insurance for high-risk catastrophic events will be an inflection point in the healthcare sector's financial trend. The inflection point will bring opportunities for market short-sellers before it occurs and low-cost providers after it passes. You heard it here first at Alfidi Capital.

SaaS financial analytic tech is apparently useful when re-configured for adaptation to healthcare's Big Data. Financial tech startups have the opportunity to address another vertical, or to pivot to healthcare if they have the sector expertise. Analytics that improve labor productivity would also be a winner in healthcare if it lowers costs. The per hour charges of employing doctors and nurses in high-touch conditions (emergency room, intensive care units) may be severe hospital pain points. I would like to see a typical hospital's KPIs to be sure that an analytics suite gives them a viable Cloudonomics solution.

I think regulatory barriers for healthcare informatics devices and systems are lower than those for drugs and care devices. HIPAA may be a lower barrier than FDA treatment protocols because data doesn't enter a human body's living systems. Startups have an implied faster and easier path to a monetized exit if they offer Big Data informatics and analytics.

A healthcare business solution's success depends on both clinical viability and a reimbursement savings path. Investors are used to seeing predictable but high growth in this sector. I was surprised to hear that frequent turnover of an insured population is a concern. If an insured person changes plan providers every two years on average, as someone claimed, it shouldn't make much difference for companies making drugs or devices because the end user still pays, either out-of-pocket or through Medicare/Medicaid. The only party that should be concerned with turnover are the insurers who need new covered policyholders to replace their cancellations.

Ecosystems matter in healthcare solutions, just like in enterprise software. I wonder who are healthcare's equivalents of software's systems integrators and consultants. Testing labs, outpatient clinics, and occupational therapists spring to mind as secondary markets, but I don't know their roles in implementing product solutions. A drug maker's ecosystem depends on its delivery modality; for example, a drug requiring subcutaneous injection needs syringe makers in its partner ecosystem, while an oral drug maker does not need a device partner. The health care sector's inherent conservatism means a strong ecosystem presents entry barriers to new competitors and imposes switching costs on existing marketing channels.

Actively managed mutual funds are late-stage investors in health care, just like Silicon Valley's other tech sectors. The late investors are still just as dumb. Mutual fund analysts are classic Dunning-Kruger effect cases. The biotech bubble makes this worse by attracting the least capable analysts and portfolio managers.

Product pricing at the patient level seems to be more art than science, partly due to a lack of data on patient efficacy. The Affordable Care Act defines payment methodologies, which IMHO demands data-centric assessments that should determine product pricing. Data privacy may be a roadblock to collecting data on patient efficacy. Privacy builds trust. Data collection must be an aggregate effort that protects privacy.

I had to silently mouth "holy canole" when one startup executive said his company filed way over 100 patents to protect their IP. Their rationale is that they needed multi-level IP protection to avoid competitors' potential prior art claims. Wow, their attorneys must love that concept. I think their legal firm took them to the cleaners with unnecessary strategies. I say Customer Development use case data plus experiential knowledge is all the trade secret protection they need in addition to their core patents. Trade secrets are probably more solid IP protection because they are unique to a specific company's processes.

Single-vertical products usually have smaller total addressable markets (TAMs) than multi-vertical ones. Adding new tech to a single-silo product (i.e., ingestible tracking mechanisms) means the tech can cross silos and find multiple TAMs. Consider virtual reality (VR) as one such tech. Using VR telemedicine will probably greatly reduce healthcare costs once Medicare/Medicaid reimbursement methodologies catch up to the market's reality. The US Department of Health and Human Services (HHS) will have to include telemedicine in outpatient care categories to make those savings real.

I am ready for my one-on-on meetings with the healthcare sector's big shots. You know where to reach me if you have room in the penthouse receptions around Union Square.