Global disruption
Unforeseen health care crisis
Wrecks all supply chains
Unforeseen health care crisis
Wrecks all supply chains
Showing posts with label health care. Show all posts
Showing posts with label health care. Show all posts
Monday, February 24, 2020
Tuesday, December 31, 2019
Recapping Alfidi Capital Coverage of JPM Healthcare Conference 2018
Hey folks, I know it's near the end of 2019 already, but I had a really interesting 2018 and 2019. I am just now publishing my thoughts on attending events around the JP Morgan Healthcare Conference in 2018. It's been quite some time, but the next conference will soon kick off in San Francisco, so I might as well look back to see if anything from 2018 is still important to know.
I still wasn't important enough in 2018 to score an invitation to the main JPM conference, so I kept busy attending a few sideline events. Someday the big shots running the big show will realize just how much they're missing by not having me inside the big tent. Anyway, here we go with some real knowledge.
Data-empowered consumers and capital efficiency were some popular concepts, staring into the face of GDPR implementation. Superfluid markets were supposed to disintermediate middle-level provider organizations, with tech shifting power to payers and patients. Gene editing got some attention, which turned out to be pretty prescient as CRISPR developments became news later in 2018. I still think it's premature to announce the death of Big Pharma, as major drug makers still survive and thrive into 2019. I can't wait to see how new "platform-based" business models will foster collaboration among insurers and lets everyone see transparent licensing data, all while somehow magically preserving privacy. Bite that silver bullet if you can, folks. I still have not seen how life science business models are moving towards the type of CX interfaces that make Uber and Amazon so easy to use. I also have not seen how open architecture models adapt to life science. I agreed with some experts who thought AI could dramatically accelerate drug trials, but I think they are too conservative in estimating that AI is still years away. The AI revolution is right here, right now, and any drug startup that leverages it now will be an immediate buyout target. Sorting through unorganized dark data that degrades machine learning capability will IMHO be one big challenge for AI use in drug development.
The Alliance for Regenerative Medicine presented their rundown of the sector's status. The regulatory approval pipeline for cell therapy products was moving along just fine. The FDA approval pathway for cell therapies called Regenerative Medicine Advanced Therapy (RMAT) designation reminds me of the orphan drug category. I wonder about the downsides to cell/gene therapy, like whether it can be weaponized by rogue actors. It's chilling to think of threat actors using open source tissue engineering for homemade bioweapons.
I cam up with some bold-type original ideas thanks to the Alliance for Regenerative Medicine presenters that investors should know, because I am a bold genius. Automated processes and AI will make the supply chain cheaper for cell and gene products, and that sounds like an opportunity for pick and shovel plays in life science stocks. I'm thinking specifically of specialty REITs for medical labs and data science companies running apps. Data libraries have a big opportunity by licensing gene population data to life sciences companies that adopt machine learning as a core function. Compare the opportunity with Microsoft's ownership of GitHub and LinkedIn as the analogy. The data populations within those two acquisitions are leverage for Microsoft's enterprise services.
There was a "leader's forum" on health care services that made me smarter. Everyone was optimistic for strong M+A and private equity buyouts, but of course this was long before the equity markets started having chest pains (pardon the health care pun) in late 2018. I wanted one of these leaders to explain their checklist-driven process for a health service provider's valuation, something investment banks and other valuation experts use prior to shopping a transaction around. Local geography still matters in service delivery, so bonus points in a valuation must go to local practices that can leverage any national networks to control their costs. I was dismayed to hear that these experts still used EBITDA to value mature medical practices, as if they were new tech startups with unproven revenues. That is really amateurish. There cannot be that much uncertainty about revenue collection even with reimbursement concerns.
Some other revelations from this leader's forum got me thinking. Medicare's definition of a hospital is based on the number of beds available and the level of care provided, which determines how providers structure their business models and how investors value these providers. I suspect there's a bubble in acquirers paying much higher multiples of revenue to acquire practices, based on unrealistic expectations in either future patient population growth or rising reimbursements.I do not expect the Affordable Care Act (ACA) structures to indefinitely continue subsidies for health care plan buyers, so take that revenue stream out of valuation calculations. The 21st Century Cures Act has now aligned multiple US government agencies on med-tech regulation, thus removing some uncertainty from the marketplace and reducing friction in medical companies' go-to-market strategies. Gene therapy needs a lot of infrastructure; retail pharma, drug manufacturing, and distribution will add up to one big bonanza.
Local economists had their own perspective on how the health care sector impacts the San Francisco Bay Area's economy. The potential repeal of the ACA without a suitable replacement is a poor approach to policy planning. There is bipartisan support for innovation in Medicare, but Medicare's political immunity from reform is partly due to resistance from insurers. I dislike any "health policy nihilism" that destroys existing architecture while leaving us bereft of whatever comes next.
My fun meter was pegged at Freemind's 13th Annual Non-Dilutive Funding Summit. I never turn down the chance to learn about how for-profit companies can get so much of their early operations funded without surrendering equity. Get the NIH and other federal partners to jumpstart your med-tech startup's research, and it enhances credibility when you seek more private funding. Check out public-private consortia like Medical Technology Enterprise Consortium (MTEC) and Advanced Technology International (ATI) as tech development accelerants. I think there's a big bonanza opportunity in combating antibiotic resistance, and BARDA's participation in the CARB-X portfolio is a funding opportunity for just such an approach. Tracking the resources at the US Government's Medical Countermeasures effort offers insight into funding for biodefense priorities. I still think crowdfunding is a option for med-tech startups; it cannot be ruled out completely as long as it's not the main effort in fundraising. The nonexpert layperson investor may not be professionally equipped to evaluate a crowdfunded med-tech project. The NIH I-Corps brings the lean startup methodology into the US Government's medical research community. Read each Funding Opportunity Agreement (FOA) carefully when you apply for an NIH grant. Uncle Sam does not mind at all if its researchers and funded programs make American entrepreneurs rich as long as they enhance our nation's security in the process. God bless America.
I don't mind taking longer than usual to evaluate what I learn at these events. Anything worth doing will be more difficult than it looks at first glance. That's why the events around the JPM Healthcare Conference 2018 were worth attending even if I could not get access to the main show. Those VIPs should save me a seat.
Author's Note: I am gradually working through a backlog of writing material that I have gathered since 2018. It will take me some time to get caught up to the present day.
I still wasn't important enough in 2018 to score an invitation to the main JPM conference, so I kept busy attending a few sideline events. Someday the big shots running the big show will realize just how much they're missing by not having me inside the big tent. Anyway, here we go with some real knowledge.
Data-empowered consumers and capital efficiency were some popular concepts, staring into the face of GDPR implementation. Superfluid markets were supposed to disintermediate middle-level provider organizations, with tech shifting power to payers and patients. Gene editing got some attention, which turned out to be pretty prescient as CRISPR developments became news later in 2018. I still think it's premature to announce the death of Big Pharma, as major drug makers still survive and thrive into 2019. I can't wait to see how new "platform-based" business models will foster collaboration among insurers and lets everyone see transparent licensing data, all while somehow magically preserving privacy. Bite that silver bullet if you can, folks. I still have not seen how life science business models are moving towards the type of CX interfaces that make Uber and Amazon so easy to use. I also have not seen how open architecture models adapt to life science. I agreed with some experts who thought AI could dramatically accelerate drug trials, but I think they are too conservative in estimating that AI is still years away. The AI revolution is right here, right now, and any drug startup that leverages it now will be an immediate buyout target. Sorting through unorganized dark data that degrades machine learning capability will IMHO be one big challenge for AI use in drug development.
The Alliance for Regenerative Medicine presented their rundown of the sector's status. The regulatory approval pipeline for cell therapy products was moving along just fine. The FDA approval pathway for cell therapies called Regenerative Medicine Advanced Therapy (RMAT) designation reminds me of the orphan drug category. I wonder about the downsides to cell/gene therapy, like whether it can be weaponized by rogue actors. It's chilling to think of threat actors using open source tissue engineering for homemade bioweapons.
I cam up with some bold-type original ideas thanks to the Alliance for Regenerative Medicine presenters that investors should know, because I am a bold genius. Automated processes and AI will make the supply chain cheaper for cell and gene products, and that sounds like an opportunity for pick and shovel plays in life science stocks. I'm thinking specifically of specialty REITs for medical labs and data science companies running apps. Data libraries have a big opportunity by licensing gene population data to life sciences companies that adopt machine learning as a core function. Compare the opportunity with Microsoft's ownership of GitHub and LinkedIn as the analogy. The data populations within those two acquisitions are leverage for Microsoft's enterprise services.
There was a "leader's forum" on health care services that made me smarter. Everyone was optimistic for strong M+A and private equity buyouts, but of course this was long before the equity markets started having chest pains (pardon the health care pun) in late 2018. I wanted one of these leaders to explain their checklist-driven process for a health service provider's valuation, something investment banks and other valuation experts use prior to shopping a transaction around. Local geography still matters in service delivery, so bonus points in a valuation must go to local practices that can leverage any national networks to control their costs. I was dismayed to hear that these experts still used EBITDA to value mature medical practices, as if they were new tech startups with unproven revenues. That is really amateurish. There cannot be that much uncertainty about revenue collection even with reimbursement concerns.
Some other revelations from this leader's forum got me thinking. Medicare's definition of a hospital is based on the number of beds available and the level of care provided, which determines how providers structure their business models and how investors value these providers. I suspect there's a bubble in acquirers paying much higher multiples of revenue to acquire practices, based on unrealistic expectations in either future patient population growth or rising reimbursements.I do not expect the Affordable Care Act (ACA) structures to indefinitely continue subsidies for health care plan buyers, so take that revenue stream out of valuation calculations. The 21st Century Cures Act has now aligned multiple US government agencies on med-tech regulation, thus removing some uncertainty from the marketplace and reducing friction in medical companies' go-to-market strategies. Gene therapy needs a lot of infrastructure; retail pharma, drug manufacturing, and distribution will add up to one big bonanza.
Local economists had their own perspective on how the health care sector impacts the San Francisco Bay Area's economy. The potential repeal of the ACA without a suitable replacement is a poor approach to policy planning. There is bipartisan support for innovation in Medicare, but Medicare's political immunity from reform is partly due to resistance from insurers. I dislike any "health policy nihilism" that destroys existing architecture while leaving us bereft of whatever comes next.
My fun meter was pegged at Freemind's 13th Annual Non-Dilutive Funding Summit. I never turn down the chance to learn about how for-profit companies can get so much of their early operations funded without surrendering equity. Get the NIH and other federal partners to jumpstart your med-tech startup's research, and it enhances credibility when you seek more private funding. Check out public-private consortia like Medical Technology Enterprise Consortium (MTEC) and Advanced Technology International (ATI) as tech development accelerants. I think there's a big bonanza opportunity in combating antibiotic resistance, and BARDA's participation in the CARB-X portfolio is a funding opportunity for just such an approach. Tracking the resources at the US Government's Medical Countermeasures effort offers insight into funding for biodefense priorities. I still think crowdfunding is a option for med-tech startups; it cannot be ruled out completely as long as it's not the main effort in fundraising. The nonexpert layperson investor may not be professionally equipped to evaluate a crowdfunded med-tech project. The NIH I-Corps brings the lean startup methodology into the US Government's medical research community. Read each Funding Opportunity Agreement (FOA) carefully when you apply for an NIH grant. Uncle Sam does not mind at all if its researchers and funded programs make American entrepreneurs rich as long as they enhance our nation's security in the process. God bless America.
I don't mind taking longer than usual to evaluate what I learn at these events. Anything worth doing will be more difficult than it looks at first glance. That's why the events around the JPM Healthcare Conference 2018 were worth attending even if I could not get access to the main show. Those VIPs should save me a seat.
Author's Note: I am gradually working through a backlog of writing material that I have gathered since 2018. It will take me some time to get caught up to the present day.
Monday, July 31, 2017
Alfidi Capital at 4th Annual Rosenman Symposium
I attended the 4th Annual Rosenman Symposium in my ceaseless quest to understand the health care sector. I arrived at the UCSF Mission Bay conference center too late to score the hot lunchtime snacks they laid out. If I had known there would be free food, I would have arrived much earlier for check-in. I had lunch before I got there, so it's not like I was starving, but I do kick myself whenever I miss a free meal. Here comes my bonanza of health care sector investing wisdom.
There are some universally acknowledged good things for health care startups to have. The good stuff includes royalty agreements with Big Pharma and grant support from big name institutes. The National Institute of Biomedical Imaging and Bioengineering (NIBIB) and UCSF Clinical and Translational Science Institute (CTSI) are undoubtedly among those big names.
Highway1 and Breakout Labs help incubate startups in biotech. I must inform the startup community that not all incubators are created equal. The ones run by serial entrepreneurs and advised by VCs who have realized returns are very selective but worth the effort to apply.
One conference speaker helpfully identified a 2x2 matrix that health care corporate development executives use to decide whether to develop a project internally or pursue an external acquisition. It reminded me of a similar matrix I saw years ago for corporate development in the telecom sector. Those corporate development types sure do get around. The corporate development approach to strategic M+A varies but does have some big common factors: synergy with existing product lines; de-risking regulatory approval; ways the target can add value or accelerate growth. Difficulty in getting reimbursements from big health care buyers like Medicare leaves incentives for corporate development to pursue startups that reduce costs. IMHO that reimbursement inefficiency is exactly why US health care is so expensive, before we even consider the costs of malpractice insurance and litigation.
The STEM pipeline for the highly skilled people needed to work in health care startups runs through multiple organizations. The ARCS Foundation pays top students to make new tech and the ARCS Foundation Northern California Chapter is their local presence. Research grants can turn a bright idea into something ready for further pre-market funding. Entrepreneurs should max out such non-dilutive investment wherever possible. Startups execs can also get non-financial inspiration from MedtechWomen, and the world certainly needs more women driving change in health care.
Medtech startups should segment their CustDev by patient type, i.e. old/young, male/female, etc. because drugs and devices will affect different sub-populations in different ways. Noting cost of delivery and value recovered by patient type will aid in establishing metrics that matter to large buyers' reimbursement plans, especially as the health care sector completes its transition away from fee-for-service and towards value-based health care. Corporate development people also want patient data that de-risks a potential startup investment even if it has not yet undergone clinical trials, so early CustDev validation really matters.
I don't have a perfect explanation for why medtech investing is trending down. I do not know if the ACA's rules or its tax on medical devices are affecting this trend. Whether federal government spending on health care will decline depends very much on whether the current Administration gets its wish for an ACA overhaul.
Consolidation among big medtech corporations may be one reason why medtech early stage funding for innovation is slowing down. On the other hand, health care is heavily regulated with big entry barriers, thus it's hard to innovate even if there's no consolidation trend. I could not discern a consensus answer on this topic from any of the conference's panelists.
The EU's medical device regulations (MDR) sets a higher bar for medical devices entering the EU market, forcing companies to revise their marketing strategies. Product development will be more costly, especially for startups. Market strategies for product launch are now likely to focus on the US market first thank to the MDR. Hey, I always knew America was number one.
I got to hear pitches from the 2017 Rosenman Innovators, a crop of promising medical device startups. The whole event reminded me to spend more time meeting people at the QB3 life science incubator in San Francisco. I have been there before and they serve decent coffee. I shall return to the Rosenman Institute's future symposiums as well, so don't forget that I was here in the first place.
 |
| Alfidi Capital at the Rosenman Symposium 2017. |
There are some universally acknowledged good things for health care startups to have. The good stuff includes royalty agreements with Big Pharma and grant support from big name institutes. The National Institute of Biomedical Imaging and Bioengineering (NIBIB) and UCSF Clinical and Translational Science Institute (CTSI) are undoubtedly among those big names.
Highway1 and Breakout Labs help incubate startups in biotech. I must inform the startup community that not all incubators are created equal. The ones run by serial entrepreneurs and advised by VCs who have realized returns are very selective but worth the effort to apply.
One conference speaker helpfully identified a 2x2 matrix that health care corporate development executives use to decide whether to develop a project internally or pursue an external acquisition. It reminded me of a similar matrix I saw years ago for corporate development in the telecom sector. Those corporate development types sure do get around. The corporate development approach to strategic M+A varies but does have some big common factors: synergy with existing product lines; de-risking regulatory approval; ways the target can add value or accelerate growth. Difficulty in getting reimbursements from big health care buyers like Medicare leaves incentives for corporate development to pursue startups that reduce costs. IMHO that reimbursement inefficiency is exactly why US health care is so expensive, before we even consider the costs of malpractice insurance and litigation.
The STEM pipeline for the highly skilled people needed to work in health care startups runs through multiple organizations. The ARCS Foundation pays top students to make new tech and the ARCS Foundation Northern California Chapter is their local presence. Research grants can turn a bright idea into something ready for further pre-market funding. Entrepreneurs should max out such non-dilutive investment wherever possible. Startups execs can also get non-financial inspiration from MedtechWomen, and the world certainly needs more women driving change in health care.
Medtech startups should segment their CustDev by patient type, i.e. old/young, male/female, etc. because drugs and devices will affect different sub-populations in different ways. Noting cost of delivery and value recovered by patient type will aid in establishing metrics that matter to large buyers' reimbursement plans, especially as the health care sector completes its transition away from fee-for-service and towards value-based health care. Corporate development people also want patient data that de-risks a potential startup investment even if it has not yet undergone clinical trials, so early CustDev validation really matters.
I don't have a perfect explanation for why medtech investing is trending down. I do not know if the ACA's rules or its tax on medical devices are affecting this trend. Whether federal government spending on health care will decline depends very much on whether the current Administration gets its wish for an ACA overhaul.
Consolidation among big medtech corporations may be one reason why medtech early stage funding for innovation is slowing down. On the other hand, health care is heavily regulated with big entry barriers, thus it's hard to innovate even if there's no consolidation trend. I could not discern a consensus answer on this topic from any of the conference's panelists.
The EU's medical device regulations (MDR) sets a higher bar for medical devices entering the EU market, forcing companies to revise their marketing strategies. Product development will be more costly, especially for startups. Market strategies for product launch are now likely to focus on the US market first thank to the MDR. Hey, I always knew America was number one.
I got to hear pitches from the 2017 Rosenman Innovators, a crop of promising medical device startups. The whole event reminded me to spend more time meeting people at the QB3 life science incubator in San Francisco. I have been there before and they serve decent coffee. I shall return to the Rosenman Institute's future symposiums as well, so don't forget that I was here in the first place.
Thursday, January 21, 2016
Ultimate Lessons From JP Morgan Healthcare Conference 2016
The end of the JP Morgan Healthcare Conference invites reflection on lessons for investing. The legions of investors populating the Union Square hotels - almost all white, male, and wearing pale blue neckties - will face challenges finding value in the health care sector's long bull market. Bears have already come out of hibernation in the larger US stock market's first two weeks of 2016. They wait to pounce on the health care sector.
Investors could have thrown a dart at the universe of stocks and funds in the large-cap health care sector after 2010 and come away winners. The bull case made sense up until mid-2015. Consider the price trajectory of one very broad health care ETF, iShares Nasdaq Biotechnology ETF (ticker IBB).
Here we see the 5-year price chart for IBB from Yahoo Finance as of January 19, 2016. Its valuation peaked in July 2015. Note that Amgen (ticker AMGN) is one of the top ten holdings. That one stock is off its 52-week high by about 17% even though Motley Fool reports that Amgen had phenomenal things to say about itself at the JP Morgan Healthcare Conference. Of course, a sector's performance is more than the financial health (pun intended) of one of its widely-held leaders.
The health care sector's long-term performance is very much dependent on the Affordable Care Act (ACA). FactCheck noted in 2014 that the ACA may be contributing to a moderation in the growth rate of per-capita health care spending. The per-capita growth since at least the 1990s has driven the profitability of drug makers and insurers, so any moderation means the sector's companies must seek more customers (i.e., plan enrollees) to sustain their earnings growth. The Economist noted in 2015 that more people are enrolled in health insurance plans even as costs per patient decline. The tradeoff of more customers for less costly coverage was always the grand bargain that the health care sector expected from the ACA to maintain its financial success.
Several CBO reports note that federal health spending continues to grow. We can find one cause for this hidden in FactCheck's 2012 discussion of cuts to growth in Medicare spending. The estimated $716B in growth savings designed to prolong the Medicare trust fund's life covers the issuance of Treasury bonds the trust fund will own. The Treasury's borrowing through such bond issuance will subsidize the ACA health plan exchanges for years. The CBO's March 2015 baseline update on the ACA's fiscal effects shows just how expensive those subsidies will become. The estimated net cost of ACA coverage, including exchange subsidies, totals over $1.2T by 2025. That total more than overtakes the original estimate of $716B Medicare savings. The ACA's effects on health care affordability are an unsustainable burden on the federal government's finances.
The ACA exchanges themselves are facing financial trouble. Premiums from healthier people are not offsetting the tax credits for poorer and sicker people. Twelve of the ACA cooperative health plans have now closed. Insolvent entities cannot continue to operate, and their closure means the surviving eleven co-ops will face more financial stress as sicker people enter their risk pools. The ACA risk corridors are underfunded. Insurers' premiums did not keep up with cost increases for those risk corridors, so either a federal bailout replenishes them or insurers raise their premiums even more. Insurers participating in ACA exchanges are facing unprofitable growth. The ACA's rules and structures force every participant in the health care sector's revenue chain - individual plan subscribers, insurers, and government transfer payment programs - to participate in an increasingly insolvent regime. The financial implications of a collapse in support for the health care sector's revenues would be disastrous for investors.
Watching The Big Short before the JP Morgan conference began offered an indirect lesson in the warning signs of an overheated sector. Only a handful of major investors anticipated the housing market's crash through 2008 by watching how adjustable-rate mortgage rates destroyed the value of pooled securities. The canary in the coal mine to watch is always whether a payment stream is sufficient to support asset valuations. Health care payments are a convoluted jumble of insurance premiums and government reimbursements. Collapsing intermediaries will obstruct such payment streams and endanger the valuation of any security tied to the health care sector. Investors will eventually have an opportunity to make their own big short in health care, much like the home mortgage big short. Analysts can someday decide which short is bigger.
Full disclosure: No positions in any securities mentioned.
Investors could have thrown a dart at the universe of stocks and funds in the large-cap health care sector after 2010 and come away winners. The bull case made sense up until mid-2015. Consider the price trajectory of one very broad health care ETF, iShares Nasdaq Biotechnology ETF (ticker IBB).
 |
| iShares Nasdaq Biotechnology ETF (IBB) from Yahoo Finance |
Here we see the 5-year price chart for IBB from Yahoo Finance as of January 19, 2016. Its valuation peaked in July 2015. Note that Amgen (ticker AMGN) is one of the top ten holdings. That one stock is off its 52-week high by about 17% even though Motley Fool reports that Amgen had phenomenal things to say about itself at the JP Morgan Healthcare Conference. Of course, a sector's performance is more than the financial health (pun intended) of one of its widely-held leaders.
The health care sector's long-term performance is very much dependent on the Affordable Care Act (ACA). FactCheck noted in 2014 that the ACA may be contributing to a moderation in the growth rate of per-capita health care spending. The per-capita growth since at least the 1990s has driven the profitability of drug makers and insurers, so any moderation means the sector's companies must seek more customers (i.e., plan enrollees) to sustain their earnings growth. The Economist noted in 2015 that more people are enrolled in health insurance plans even as costs per patient decline. The tradeoff of more customers for less costly coverage was always the grand bargain that the health care sector expected from the ACA to maintain its financial success.
Several CBO reports note that federal health spending continues to grow. We can find one cause for this hidden in FactCheck's 2012 discussion of cuts to growth in Medicare spending. The estimated $716B in growth savings designed to prolong the Medicare trust fund's life covers the issuance of Treasury bonds the trust fund will own. The Treasury's borrowing through such bond issuance will subsidize the ACA health plan exchanges for years. The CBO's March 2015 baseline update on the ACA's fiscal effects shows just how expensive those subsidies will become. The estimated net cost of ACA coverage, including exchange subsidies, totals over $1.2T by 2025. That total more than overtakes the original estimate of $716B Medicare savings. The ACA's effects on health care affordability are an unsustainable burden on the federal government's finances.
The ACA exchanges themselves are facing financial trouble. Premiums from healthier people are not offsetting the tax credits for poorer and sicker people. Twelve of the ACA cooperative health plans have now closed. Insolvent entities cannot continue to operate, and their closure means the surviving eleven co-ops will face more financial stress as sicker people enter their risk pools. The ACA risk corridors are underfunded. Insurers' premiums did not keep up with cost increases for those risk corridors, so either a federal bailout replenishes them or insurers raise their premiums even more. Insurers participating in ACA exchanges are facing unprofitable growth. The ACA's rules and structures force every participant in the health care sector's revenue chain - individual plan subscribers, insurers, and government transfer payment programs - to participate in an increasingly insolvent regime. The financial implications of a collapse in support for the health care sector's revenues would be disastrous for investors.
Watching The Big Short before the JP Morgan conference began offered an indirect lesson in the warning signs of an overheated sector. Only a handful of major investors anticipated the housing market's crash through 2008 by watching how adjustable-rate mortgage rates destroyed the value of pooled securities. The canary in the coal mine to watch is always whether a payment stream is sufficient to support asset valuations. Health care payments are a convoluted jumble of insurance premiums and government reimbursements. Collapsing intermediaries will obstruct such payment streams and endanger the valuation of any security tied to the health care sector. Investors will eventually have an opportunity to make their own big short in health care, much like the home mortgage big short. Analysts can someday decide which short is bigger.
Full disclosure: No positions in any securities mentioned.
Friday, January 15, 2016
Wellness Center USA In The Pennies
Wellness Center USA (ticker WCUI) is one of those micro-cap companies that only deserves a look long enough to move along. It reminds me of why I am always so skeptical of penny stocks. The company occupies several verticals related to health care that should theoretically cross-sell products and services. Theory is different from reality.
It is strange to see such a small-cap company organize its primary product lines as stand-alone corporate subsidiaries. It would be cheaper and easier to focus on one thing and spin off whatever isn't working. The company states on its website that it seeks to acquire other health care companies. They should really try to grow what they already have before buying something else. Too many different products will distract management's attention from scaling, because each thing scales into a slightly different vertical.
The current management bios made me chuckle while shaking my head. I certainly did not expect to see the same two bios listed twice on a single-page website. I am not interested in leaders who took previous companies through reverse mergers in unrelated industries. I have seen such maneuvers before and they rarely add the kind of value that comes from organic growth. It's really funny to hear an executive bio mention numerous publications and inventions under development. Yeah, I've got plenty of ideas in development too, but it won't drive revenue to my Web properties until I actually publish the stuff.
The company's Psoria-Shield is some kind of UV treatment for skin conditions. Independent sources can tell us whether UV treatment is effective. The National Eczema Association thinks UV therapies are somewhat helpful in remittive therapy, but the treatments require frequent outpatient visits that may not always be covered by insurance. The National Psoriasis Foundation thinks UVB works well with other therapies, but then again so does natural sunlight all by itself. The NCBI archived an article on narrowband UVB's apparent effectiveness in nonpsoriatic conditions. The science behind this therapy type is somewhat encouraging but not conclusive enough for some insurance companies' reimbursement methods. Read Aetna's positions on various UV therapies to see the difficulty of building a business model on therapies still considered experimental in many cases..
Wellness Center USA's unaudited 10-Q SEC filing dated August 25, 2015 showed cash on hand of US$126K and current liabilities of over $959K. They had better earn some serious income ASAP to pay that off, but that will be difficult with a net loss for the quarter of over -$525K. The financial statements also showed an enormous amount of goodwill from their acquired companies. I am usually disappointed to see small companies portray intangible assets so optimistically before they have successfully monetized their primary products. Read what the company says in its own 10-Q about how it must continually raise new capital because of its burn rate. Shareholders will see further dilution.
I don't know why the "investment professionals" who sent me information about this company still have me on their contact list. They should know by now that I don't invest in penny stocks with difficult earnings histories.
Full disclosure: No position in WCUI at this time.
It is strange to see such a small-cap company organize its primary product lines as stand-alone corporate subsidiaries. It would be cheaper and easier to focus on one thing and spin off whatever isn't working. The company states on its website that it seeks to acquire other health care companies. They should really try to grow what they already have before buying something else. Too many different products will distract management's attention from scaling, because each thing scales into a slightly different vertical.
The current management bios made me chuckle while shaking my head. I certainly did not expect to see the same two bios listed twice on a single-page website. I am not interested in leaders who took previous companies through reverse mergers in unrelated industries. I have seen such maneuvers before and they rarely add the kind of value that comes from organic growth. It's really funny to hear an executive bio mention numerous publications and inventions under development. Yeah, I've got plenty of ideas in development too, but it won't drive revenue to my Web properties until I actually publish the stuff.
The company's Psoria-Shield is some kind of UV treatment for skin conditions. Independent sources can tell us whether UV treatment is effective. The National Eczema Association thinks UV therapies are somewhat helpful in remittive therapy, but the treatments require frequent outpatient visits that may not always be covered by insurance. The National Psoriasis Foundation thinks UVB works well with other therapies, but then again so does natural sunlight all by itself. The NCBI archived an article on narrowband UVB's apparent effectiveness in nonpsoriatic conditions. The science behind this therapy type is somewhat encouraging but not conclusive enough for some insurance companies' reimbursement methods. Read Aetna's positions on various UV therapies to see the difficulty of building a business model on therapies still considered experimental in many cases..
Wellness Center USA's unaudited 10-Q SEC filing dated August 25, 2015 showed cash on hand of US$126K and current liabilities of over $959K. They had better earn some serious income ASAP to pay that off, but that will be difficult with a net loss for the quarter of over -$525K. The financial statements also showed an enormous amount of goodwill from their acquired companies. I am usually disappointed to see small companies portray intangible assets so optimistically before they have successfully monetized their primary products. Read what the company says in its own 10-Q about how it must continually raise new capital because of its burn rate. Shareholders will see further dilution.
I don't know why the "investment professionals" who sent me information about this company still have me on their contact list. They should know by now that I don't invest in penny stocks with difficult earnings histories.
Full disclosure: No position in WCUI at this time.
Thursday, January 14, 2016
Non-Dilutive Funding Summits Offer Free Insights
I attend as many local finance events as possible. The week's JP Morgan Healthcare Conference 2016 brought out lots of supporting events to keep me busy. I attended the FreeMind 11th Annual Non-Dilutive Funding Summit because I need to know how startups can raise money without giving up eventual riches. I have no badge selfie this time so you'll just have to imagine me there. The speakers were tailored for a life science audience given JPM's presence this week. I'll share my own thoughts below based on what I learned.
The federal government's SBIR and STTR programs are big funders of projects that meet the government's program requirements. The Milken Institute's report “Estimating Long-term Economic Returns of NIH on Output in the Biosciences” shows how the NIH's non-dilutive funding has tremendous leverage on future funding and economic output. I don't know why some federal agencies cluster their awards in certain parts of the fiscal calendar. Maybe they just don't get enough interested applicants for a regular award cycle, or maybe they just procrastinate. It's good to know that small businesses owned by private investment funds are eligible for SBIR/STTR funding.
The US government is not necessarily the ideal target market for most pharma startups. The government's niche drug needs for low-volume doses do not offer the same scalability of a high-ROI commercial market. Furthermore, I suspect that the government's need to stockpile even large doses of drugs for emergency use requires only periodic replenishment every few years as stocks expire. Contracts for definite delivery of definite quantities do not offer private companies the same quality of earnings as regular sales through commercial channels. Startups targeting a government or military customer should use that non-dilutive funding to enable penetration of a larger commercial market if their solution has more than one application. Realistic startups will not get rich on DOD's need for bio/chem war countermeasures, but will instead recognize the useful partnership and validation that comes with DOD research funding.
I am pleasantly surprised to learn that FDA priority review vouchers can be sold in private transactions. Netting a few hundred million dollars for a voucher is a sweet deal. Perusing the FDA's Center for Drug Evaluation and Research (CDER) Small Business and Industry Assistance (SBIA) webpages reveals a whole bunch of tax credits and other incentives for drug developers addressing special situations. Here's a legal path to riches in drugs, kids. Stay away from the ghetto street dealers, earn your MD or PhD, and get Uncle Sam to fund your commercial drug lab.
The NIH's NIAID funds Phase I efforts and helps companies find a transition partner for Phase II. Centers of Excellence for Translational Research (CETR) are NIAID's academic research partners offering subject matter expertise for medical tech under review. The Bayh-Dole Act's procedures for determining exceptional circumstances (DEC) apply to tech transfer in the life sciences, just as they do to other government tech commercialization efforts. Small companies can use Bayh-Dole's leverage in a DEC to get funding if they commit to accelerating a technology's development.
Salespeople know that more frequent contact in highly targeted campaigns gets better results. Raising capital is a lot like selling a product. I will not listen to self-proclaimed experts who sell exorbitantly priced marketing solutions. Cheap or free marketing efforts are best. Scientists who have never left an academic research lab need a business partner who can sell. Just ask the Google founders. Startups staying in stealth mode longer than needed miss out on publicity and fundraising that they need to accelerate. The stealth aficionados need to get out more to see that tech ideas are more common than execution ability.
I want to see good definitions of the clinical research phases that describe the value-added things entrepreneurs can do before Phase I. Some private funders in venture philanthropy break down pre-Phase I tasks in different ways. Entrepreneurs need those things so they can leave stealth mode quickly. They also need good data on unmet needs in medical conditions to guide assessments of viable markets. I found some basic unmet needs descriptions of Parkinson's disease and multiple sclerosis with a Google search. The truth is out there.
It's really great to see the NIH National Cancer Institute's SBIR program offer an I-Corps pilot program. The popular biotech forums like BIO Innovation Zone and AdvaMed's MedTech Showcase are the kinds of places where life science researchers cam meet entrepreneurs. Once they start hanging out together, they can start commercializing government research and jump into I-Corps training. They can start by exploring NIBIB's Biomedical Technology Resource Centers (BTRCs) for data at the BTR Portal that supports a technology's commercial prospects.
Greedy business people can forget about buying influence with the US government. The interest of a powerful government patron means nothing at all in funding tech. Government program managers must follow rigorous guidelines and scientific evaluation criteria when awarding grants and research contracts. Contact with a senior government official may get a private company some feedback on the government's procurement interests, and nothing else. I have to laugh at companies like Theranos who stuff their advisory boards with prestigious former government people. Lobbying for influence is a waste of money.
The Milken Institute / FasterCures report "Fixes in Financing" from April 2012 is a much better guide to funding success than what any retired political hack could offer. It would be more useful for a life sciences startup to have an advisory board of grant experts, government contracting experts, and NIH subject matter expert reviewers than some Theranos-type board of clueless celebrities. Startups should also read NCBI's 2013 article "Estimating Return on Investment in Translational Research: Methods and Protocols" to appreciate how some government funding reviews incorporate ROI calculations into awards.
It's worth noting that SBIRs can have slightly less stringent requirements than STTRs. The SBIRs can also have broader objectives in socioeconomic development and keeping the industrial base warm. Government managers may just offer SBIR grants to generate some random innovation even if the result doesn't completely meet a procurement requirement.
I suspect that private companies seeking non-dilutive capital may have no clue how to describe a minimum viable product (MVP) using technology readiness levels (TRLs). I want any startup in my private equity portfolio to use those TRL milestones when they submit SBIR/STTR applications or develop cooperative research and development agreement (CRADAs).
Non-dilutive funding saves small company founders from giving away ownership too early in the life of their big idea. Only private industry can do large-scale manufacturing and distribution, so late-stage companies will have to seek dilutive funding for final commercialization. Taking the free money up front from government agencies and non-profit venture philanthropists is always a smart move.
The federal government's SBIR and STTR programs are big funders of projects that meet the government's program requirements. The Milken Institute's report “Estimating Long-term Economic Returns of NIH on Output in the Biosciences” shows how the NIH's non-dilutive funding has tremendous leverage on future funding and economic output. I don't know why some federal agencies cluster their awards in certain parts of the fiscal calendar. Maybe they just don't get enough interested applicants for a regular award cycle, or maybe they just procrastinate. It's good to know that small businesses owned by private investment funds are eligible for SBIR/STTR funding.
The US government is not necessarily the ideal target market for most pharma startups. The government's niche drug needs for low-volume doses do not offer the same scalability of a high-ROI commercial market. Furthermore, I suspect that the government's need to stockpile even large doses of drugs for emergency use requires only periodic replenishment every few years as stocks expire. Contracts for definite delivery of definite quantities do not offer private companies the same quality of earnings as regular sales through commercial channels. Startups targeting a government or military customer should use that non-dilutive funding to enable penetration of a larger commercial market if their solution has more than one application. Realistic startups will not get rich on DOD's need for bio/chem war countermeasures, but will instead recognize the useful partnership and validation that comes with DOD research funding.
I am pleasantly surprised to learn that FDA priority review vouchers can be sold in private transactions. Netting a few hundred million dollars for a voucher is a sweet deal. Perusing the FDA's Center for Drug Evaluation and Research (CDER) Small Business and Industry Assistance (SBIA) webpages reveals a whole bunch of tax credits and other incentives for drug developers addressing special situations. Here's a legal path to riches in drugs, kids. Stay away from the ghetto street dealers, earn your MD or PhD, and get Uncle Sam to fund your commercial drug lab.
The NIH's NIAID funds Phase I efforts and helps companies find a transition partner for Phase II. Centers of Excellence for Translational Research (CETR) are NIAID's academic research partners offering subject matter expertise for medical tech under review. The Bayh-Dole Act's procedures for determining exceptional circumstances (DEC) apply to tech transfer in the life sciences, just as they do to other government tech commercialization efforts. Small companies can use Bayh-Dole's leverage in a DEC to get funding if they commit to accelerating a technology's development.
Salespeople know that more frequent contact in highly targeted campaigns gets better results. Raising capital is a lot like selling a product. I will not listen to self-proclaimed experts who sell exorbitantly priced marketing solutions. Cheap or free marketing efforts are best. Scientists who have never left an academic research lab need a business partner who can sell. Just ask the Google founders. Startups staying in stealth mode longer than needed miss out on publicity and fundraising that they need to accelerate. The stealth aficionados need to get out more to see that tech ideas are more common than execution ability.
I want to see good definitions of the clinical research phases that describe the value-added things entrepreneurs can do before Phase I. Some private funders in venture philanthropy break down pre-Phase I tasks in different ways. Entrepreneurs need those things so they can leave stealth mode quickly. They also need good data on unmet needs in medical conditions to guide assessments of viable markets. I found some basic unmet needs descriptions of Parkinson's disease and multiple sclerosis with a Google search. The truth is out there.
It's really great to see the NIH National Cancer Institute's SBIR program offer an I-Corps pilot program. The popular biotech forums like BIO Innovation Zone and AdvaMed's MedTech Showcase are the kinds of places where life science researchers cam meet entrepreneurs. Once they start hanging out together, they can start commercializing government research and jump into I-Corps training. They can start by exploring NIBIB's Biomedical Technology Resource Centers (BTRCs) for data at the BTR Portal that supports a technology's commercial prospects.
Greedy business people can forget about buying influence with the US government. The interest of a powerful government patron means nothing at all in funding tech. Government program managers must follow rigorous guidelines and scientific evaluation criteria when awarding grants and research contracts. Contact with a senior government official may get a private company some feedback on the government's procurement interests, and nothing else. I have to laugh at companies like Theranos who stuff their advisory boards with prestigious former government people. Lobbying for influence is a waste of money.
The Milken Institute / FasterCures report "Fixes in Financing" from April 2012 is a much better guide to funding success than what any retired political hack could offer. It would be more useful for a life sciences startup to have an advisory board of grant experts, government contracting experts, and NIH subject matter expert reviewers than some Theranos-type board of clueless celebrities. Startups should also read NCBI's 2013 article "Estimating Return on Investment in Translational Research: Methods and Protocols" to appreciate how some government funding reviews incorporate ROI calculations into awards.
It's worth noting that SBIRs can have slightly less stringent requirements than STTRs. The SBIRs can also have broader objectives in socioeconomic development and keeping the industrial base warm. Government managers may just offer SBIR grants to generate some random innovation even if the result doesn't completely meet a procurement requirement.
I suspect that private companies seeking non-dilutive capital may have no clue how to describe a minimum viable product (MVP) using technology readiness levels (TRLs). I want any startup in my private equity portfolio to use those TRL milestones when they submit SBIR/STTR applications or develop cooperative research and development agreement (CRADAs).
Non-dilutive funding saves small company founders from giving away ownership too early in the life of their big idea. Only private industry can do large-scale manufacturing and distribution, so late-stage companies will have to seek dilutive funding for final commercialization. Taking the free money up front from government agencies and non-profit venture philanthropists is always a smart move.
Wednesday, January 13, 2016
The Haiku of Finance for 01/13/16
Paying for health care
Usage divorced from billing
Patient unaware
Usage divorced from billing
Patient unaware
Monday, January 11, 2016
The Haiku of Finance for 01/11/16
Patient care data
Saving lives and health care costs
Big hospital cash
Saving lives and health care costs
Big hospital cash
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.
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.
Sunday, January 03, 2016
CytoSorbents Continues Despite Disappointing Financials
CytoSorbents Corporation (ticker CTSO) has a brand new approach to removing blood impurities in critically ill patients. Hemoperfusion is one of several extracorporeal methods that capture and remove potential threats from blood. IBISWorld thinks the total blood dialysis market is quite large, and the revenues of publicly traded dialysis leaders are indeed sizeable. A simple glance at the financials of dialysis market leaders Eli Lilly (ticker LLY), Baxter International (ticker BAX), and Fresenius Medical Care (ticker FMS) shows how difficult it will be for Cytosorbents to make headway.
The most relevant comparison should be between CytoSorbents and Fresenius because their product lines are both specific to the blood dialysis market. Here's a basic comparison, from the latest available reporting periods.
CTSO
Gross revenue (ttm): $3.9M
Profit margin: -284.9%
ROE: -127.6%
EPS: -$0.69
FMS
Gross revenue (ttm): $17.1B
Profit margin: 6.12%
ROE: 12.2%
EPS: $1.72
It's not even close. Fresenius is by far the more successful company. I'm not sure why CytoSorbents even went public in the first place, or why their executive team's compensation is so high, given their very poor financial performance. They have almost doubled their gross revenue each year since 2012 but their negative net income grows even larger. That's just plain embarrassing.
I had some hope that a deeper look into CytoSorbents would reveal something worth seeing. I just can't see past those very disappointing top line and bottom line results over several years. The retained earnings were over -$130M by the end of September 2015, and that's a huge negative hole for a small company fighting into a mature market with high regulatory barriers. I don't think I need to take this any farther. It is obvious that CTSO does not deserve to be anywhere near my own money.
Full disclosure: No position in CTSO or any other stocks mentioned at this time.
The most relevant comparison should be between CytoSorbents and Fresenius because their product lines are both specific to the blood dialysis market. Here's a basic comparison, from the latest available reporting periods.
CTSO
Gross revenue (ttm): $3.9M
Profit margin: -284.9%
ROE: -127.6%
EPS: -$0.69
FMS
Gross revenue (ttm): $17.1B
Profit margin: 6.12%
ROE: 12.2%
EPS: $1.72
It's not even close. Fresenius is by far the more successful company. I'm not sure why CytoSorbents even went public in the first place, or why their executive team's compensation is so high, given their very poor financial performance. They have almost doubled their gross revenue each year since 2012 but their negative net income grows even larger. That's just plain embarrassing.
I had some hope that a deeper look into CytoSorbents would reveal something worth seeing. I just can't see past those very disappointing top line and bottom line results over several years. The retained earnings were over -$130M by the end of September 2015, and that's a huge negative hole for a small company fighting into a mature market with high regulatory barriers. I don't think I need to take this any farther. It is obvious that CTSO does not deserve to be anywhere near my own money.
Full disclosure: No position in CTSO or any other stocks mentioned at this time.
Saturday, December 12, 2015
Friday, November 20, 2015
Wednesday, October 14, 2015
The Haiku of Finance for 10/14/15
Brain science research
New tech for human thinking
Mindful for money
New tech for human thinking
Mindful for money
Veterans' Health Matters To NCIRE Supporters
I accepted an invitation to attend tonight's introductory lecture for NCIRE's annual conference on brain health. Gen. George Casey (US Army, Ret.), former Chief of Staff of the US Army, gave his talk after Medal of Honor recipient Paul Bucha introduced him. One of the people on hand told me that every VA hospital that has some affiliation with a university medical school has a non-profit fundraising entity like NCIRE.
I like what Mr. Bucha said about how integrity builds trust and leads to successful leadership, and that the best leaders are compassionate. It's great that an MOH recipient recognizes things that many military leaders regard as mere lip service rituals. Gen. Casey shared the sobering findings from multiple military health assessments that drove him to change Army practices when he was Chief of the service. The one survey finding I noticed most readily was the disturbing lack of fidelity to ethics among Army people. I learned that firsthand as a lieutenant and captain. Righting wrongs is always the best way to live.
I am fortunate that I do not have PTS from my active duty tour in Iraq. I used to feel some stress when my fellow alumni from the University of Notre Dame and the University of San Francisco told me my military background was worthless. I no longer feel that way because I don't need negative forces cramping my style. Removing bad people from one's life is always the right thing to do.
I can't see a business connection here relevant to Alfidi Capital. Kudos to NCIRE and the VA for inviting private sector partners to participate in their research. The VA's tech transfer program deserves Silicon Valley's interest. I am in no position to fund NCIRE's research, but I'll give them free publicity here on this blog.
I like what Mr. Bucha said about how integrity builds trust and leads to successful leadership, and that the best leaders are compassionate. It's great that an MOH recipient recognizes things that many military leaders regard as mere lip service rituals. Gen. Casey shared the sobering findings from multiple military health assessments that drove him to change Army practices when he was Chief of the service. The one survey finding I noticed most readily was the disturbing lack of fidelity to ethics among Army people. I learned that firsthand as a lieutenant and captain. Righting wrongs is always the best way to live.
I am fortunate that I do not have PTS from my active duty tour in Iraq. I used to feel some stress when my fellow alumni from the University of Notre Dame and the University of San Francisco told me my military background was worthless. I no longer feel that way because I don't need negative forces cramping my style. Removing bad people from one's life is always the right thing to do.
I can't see a business connection here relevant to Alfidi Capital. Kudos to NCIRE and the VA for inviting private sector partners to participate in their research. The VA's tech transfer program deserves Silicon Valley's interest. I am in no position to fund NCIRE's research, but I'll give them free publicity here on this blog.
Tuesday, March 10, 2015
The Haiku of Finance for 03/10/15
Biotech blowoff
ZIRP and health care spending growth
Drive pricey forecast
ZIRP and health care spending growth
Drive pricey forecast
Biotech Blowoff Beats Even Dot-Com Madness
Annual health tech fests like the JPMorgan Health Care Conference, Biotech Showcase, and One Med Forum came and went this year in San Francisco. The star performers in this sector no doubt have a lot to brag about. They will also have a lot of explaining to do when the biotech and health care sectors eventually crash.
The NASDAQ Biotechnology Index (NBI) has only been around since November 1993. It does not have as much history with the United States business cycle as the S&P 500. Retail investors did not need to pick stocks in this sector to compensate for whatever they lost in the 1990s dot-com crash. The iShares Nasdaq Biotechnology ETF (ticker IBB) was priced at $95.32 at inception on Feb. 12, 2001. It now stands at $341.43, a healthy gain for anyone who held it through the financial crisis and didn't get spooked when it dropped into the high 50s in March 2009.
Consider that IBB's P/E of 24 signals a valuation far out of whack with what the health care sector of the economy can deliver in the future. IBB's components are large-cap stocks heavily weighted towards pharmaceuticals. Specialty drug makers have received an unsustainably large portion of prescription spending in recent years. The health insurance coverage that sustains all prescription spending is now heavily dependent on ACA subsidies. Anecdotes about the Affordable Care Act pale in comparison to the government's National Health Expenditure (NHE) data, which show how further projected increases in health care spending through 2023 are strongly driven by ACA coverage expansion.
Continued ACA subsidies, like all other federal discretionary spending, depend very much on the US government's ability to borrow at low interest rates indefinitely. That is unsustainable. Any upward movement in interest rates would explode the federal government's interest costs on sovereign debt and immediately crowd out discretionary programs. The likely effects on politically popular entitlements like ACA handouts would include inflation indexing. Uncle Sam is an expert practitioner at artificially understating inflation to save on CPI-based entitlement costs. The end of endless cheap borrowing will bring the end of meaningful ACA subsidies and Medicare reimbursements. The health care and biotech sectors will not escape that banquet of consequences.
Full disclosure: No position in IBB at this time. No position in other health care or biotech stocks at this time. One small private equity position in one medical device startup.
The NASDAQ Biotechnology Index (NBI) has only been around since November 1993. It does not have as much history with the United States business cycle as the S&P 500. Retail investors did not need to pick stocks in this sector to compensate for whatever they lost in the 1990s dot-com crash. The iShares Nasdaq Biotechnology ETF (ticker IBB) was priced at $95.32 at inception on Feb. 12, 2001. It now stands at $341.43, a healthy gain for anyone who held it through the financial crisis and didn't get spooked when it dropped into the high 50s in March 2009.
Consider that IBB's P/E of 24 signals a valuation far out of whack with what the health care sector of the economy can deliver in the future. IBB's components are large-cap stocks heavily weighted towards pharmaceuticals. Specialty drug makers have received an unsustainably large portion of prescription spending in recent years. The health insurance coverage that sustains all prescription spending is now heavily dependent on ACA subsidies. Anecdotes about the Affordable Care Act pale in comparison to the government's National Health Expenditure (NHE) data, which show how further projected increases in health care spending through 2023 are strongly driven by ACA coverage expansion.
Continued ACA subsidies, like all other federal discretionary spending, depend very much on the US government's ability to borrow at low interest rates indefinitely. That is unsustainable. Any upward movement in interest rates would explode the federal government's interest costs on sovereign debt and immediately crowd out discretionary programs. The likely effects on politically popular entitlements like ACA handouts would include inflation indexing. Uncle Sam is an expert practitioner at artificially understating inflation to save on CPI-based entitlement costs. The end of endless cheap borrowing will bring the end of meaningful ACA subsidies and Medicare reimbursements. The health care and biotech sectors will not escape that banquet of consequences.
Full disclosure: No position in IBB at this time. No position in other health care or biotech stocks at this time. One small private equity position in one medical device startup.
Saturday, February 14, 2015
The Haiku of Finance for 02/14/15
BuzzFeed for health care
Share and click but do not think
How entertaining
Share and click but do not think
How entertaining
Viral Marketing Lessons From The BuzzFeed Video For ACA 2015 Enrollment
The latest BuzzFeed video touting enrollment in ACA-compliant health insurance plans is a winner. Plenty of social media addicts grokked its significance immediately, and plenty more people shared it enthusiastically. Millions of people clicked on Healthcare.gov as expected. I must admit I could not make hide nor hare of it when I first watched it. There must be a generational divide at work.
Effective advertising normally requires some build-up to a call to action. In this video, the call to action "sign up for health care" is buried in the middle at 0:50-1:00 with no context other than the star making funny faces. The ad could have ended right there to make its point, but later wanders into the #thanks meme that diminishes the ad's message. Mentioning the meme calls attention to Healthcare.gov's critics without addressing their criticisms. That's why this doesn't work as a traditional ad. Compare it to the most beloved Super Bowl ads of any year. The typical blockbuster ad manages to be cool by associating cool images (people and/or animals having fun) with a call to action at the end: drink our beer, test drive our car. The product is also displayed visually somehow (the car in motion) with the brand superimposed. This is so even the most ADHD-afflicted viewers can't miss it. Compare that very effective messaging to this BuzzFeed video, which depends on tech-savvy people who are already cued in to the message to explain it through social media shares. Again, this would not be effective messaging in a passive medium like a TV commercial.
Viral sharing among Millennials turns traditional advertising inside out. I shared this video via Facebook and saw the generation gap firsthand. My slightly older friends at the high end of Generation X thought it was pointless. My younger Millennial friends loved it for the main star and the disguised message. They didn't even notice the non sequitur text explanation under the video of how a selfie stick somehow leads to a desire to sign up for health insurance. The mere display of a link to something is enough of a call to action for Millennials.
The video is phenomenal for its innovative take on the #thanks meme. The original #thanks propagators were critics of the health care mandate who saw their premiums increase or had serious problems logging on to enroll. In a capitalist economy, any corporation that saw its brand name dragged through the mud by millions of customer complaints would immediately rectify the situation with some combo of lower prices, better service, and a marketing campaign to explain their progress. The BuzzFeed video mocking the #thanks complainers turns that customer service philosophy on its head. Complaints about health care services are meaningless when a mandate compels compliance.
It wouldn't have mattered if the star of this video were a notable human or Grumpy Cat. Social media addicts only need to recognize two things: a celebrity appears, and there's a link to be clicked. YouTube has trained humans to click embedded links that appear in fun videos with the expectation that another fun spectacle awaits. Facebook has trained humans to click the Like button after watching something funny. Clicking ahead to a government compliance site is exactly what a trained audience is supposed to do. No critical thinking is required.
America is not a monarchy, despite the pretensions of our hereditary elite. Our leaders endear themselves to us by exhibiting self-deprecating humor. President Nixon showed us how to have fun when he said "Sock it to me?" on Laugh-In. America loves to be entertained. Mandatory health insurance can be entertaining, mostly for those who watch the payments roll in. A spoonful of sugar from a viral ad helps the medicine go down.
Effective advertising normally requires some build-up to a call to action. In this video, the call to action "sign up for health care" is buried in the middle at 0:50-1:00 with no context other than the star making funny faces. The ad could have ended right there to make its point, but later wanders into the #thanks meme that diminishes the ad's message. Mentioning the meme calls attention to Healthcare.gov's critics without addressing their criticisms. That's why this doesn't work as a traditional ad. Compare it to the most beloved Super Bowl ads of any year. The typical blockbuster ad manages to be cool by associating cool images (people and/or animals having fun) with a call to action at the end: drink our beer, test drive our car. The product is also displayed visually somehow (the car in motion) with the brand superimposed. This is so even the most ADHD-afflicted viewers can't miss it. Compare that very effective messaging to this BuzzFeed video, which depends on tech-savvy people who are already cued in to the message to explain it through social media shares. Again, this would not be effective messaging in a passive medium like a TV commercial.
Viral sharing among Millennials turns traditional advertising inside out. I shared this video via Facebook and saw the generation gap firsthand. My slightly older friends at the high end of Generation X thought it was pointless. My younger Millennial friends loved it for the main star and the disguised message. They didn't even notice the non sequitur text explanation under the video of how a selfie stick somehow leads to a desire to sign up for health insurance. The mere display of a link to something is enough of a call to action for Millennials.
The video is phenomenal for its innovative take on the #thanks meme. The original #thanks propagators were critics of the health care mandate who saw their premiums increase or had serious problems logging on to enroll. In a capitalist economy, any corporation that saw its brand name dragged through the mud by millions of customer complaints would immediately rectify the situation with some combo of lower prices, better service, and a marketing campaign to explain their progress. The BuzzFeed video mocking the #thanks complainers turns that customer service philosophy on its head. Complaints about health care services are meaningless when a mandate compels compliance.
It wouldn't have mattered if the star of this video were a notable human or Grumpy Cat. Social media addicts only need to recognize two things: a celebrity appears, and there's a link to be clicked. YouTube has trained humans to click embedded links that appear in fun videos with the expectation that another fun spectacle awaits. Facebook has trained humans to click the Like button after watching something funny. Clicking ahead to a government compliance site is exactly what a trained audience is supposed to do. No critical thinking is required.
America is not a monarchy, despite the pretensions of our hereditary elite. Our leaders endear themselves to us by exhibiting self-deprecating humor. President Nixon showed us how to have fun when he said "Sock it to me?" on Laugh-In. America loves to be entertained. Mandatory health insurance can be entertaining, mostly for those who watch the payments roll in. A spoonful of sugar from a viral ad helps the medicine go down.
Saturday, November 29, 2014
Tuesday, November 25, 2014
The Haiku of Finance for 11/25/14
Big health care loophole
Illegal workers get through
Free care from clinics
Illegal workers get through
Free care from clinics
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