One way to a better America, as we’ve been arguing for many years, would be to follow a path toward resource independence. Since we’re not going to get there any time soon, let’s talk about another, different route toward a better America: namely, by making dramatic improvements in our health care system.
This is a wide open area, and unfortunately, one that’s failing – irrespective of whether Obamacare is upheld or shot down, or other programs come along. One important reason it’s failing, in our opinion, is that massive amounts of money are being poured into drugs with almost no bang for the buck.
Over the weekend I read the obituary of Dr. Lester Breslow, one of the country’s foremost leaders in the field of public health. He was formerly dean of UCLA’s Fielding School of Public Health, and directed a landmark research project that provided mathematical proof of the notion that people can live longer and healthier by making certain lifestyle changes. Specifically: do not smoke; drink in moderation; sleep seven to eight hours; exercise at least moderately; eat regular meals; maintain a moderate weight; and eat breakfast.
The study, which tracked a group over nearly 7,000 individuals over periods of as much as 20 years, showed that a 45-year-old with at least six of the seven aforementioned healthy habits had a life expectancy 11 years longer than someone with three or fewer.
Incidentally, Dr. Breslow was 97 years old when he died.
We mention this because it seems more and more the case that the consistent applications of simple, commonsense approaches to health care could save a tremendous amount of money.
Obviously, investors can’t make money on this. But to focus on another dimension of the healthcare picture (and here we’re talking about not just the U.S. but the West in general), neurological disorders alone carry a price-tag of about $1 trillion a year in both direct costs like hospitalization, etc. and indirect costs, such as hours of lost productivity.
What’s discouraging here is the extraordinary lack of progress in this area. To take Parkinson’s disease as just one example, the drug of choice today for early stage Parkinson’s is called L-Dopa. If you ever watch the TV show Mad Men, which is set in the 1960s, and a case of Parkinson’s comes up, chances are the individual concerned would be put on – you guessed it – L-Dopa. Fifty years without any progress is, to say the least, frustrating. We’re venting a little bit here, angry at the FDA, angry at the bureaucracy that prevents good drugs from being approved, angry at the utter lack of coordination between biometrics and drug research… all of which, if corrected, in our opinion would lead to much better results.
To give just one example, recently a new anti-depressant called TC-5214, developed by Targacept (TRGT) in collaboration with AstraZeneca (AZN), failed to meet endpoints in Phase 3 trials even though it reduced symptoms by 40 percent. The reason: it did not significantly outperform placebos.
What’s remarkable here is that the tests used to establish endpoints in these trials were so badly constructed that had they been submitted as a Ph.D. dissertation by a graduate student in psychometrics at any good university, without question they would have been rejected. I make these observations as someone who earned a Ph.D. in psychology and took measurement courses from those who were the best in the land. Believe me, the holes in the testing were so egregious that it’s not even worth going into. (Should anyone want to contact me to discuss this further, I’ll be happy to do so.)
In any event, the country is in desperate need of coordination between all the different areas I mentioned above. Switching from neurology to another massive cost, metabolic disorders, at long last GLP (glucagon-like peptide) drugs for Type-2 diabetes are starting to take off. Novo Nordisk (NVO) has been first out of the box, and you can see it in the company’s share price, which has quadrupled. Amylin Pharmaceuticals (AMLN), which was held back for a variety of ridiculous reasons that we’ve talked about before, is also on the road with their version of the molecules. In our opinion, the Amylin formulation is somewhat better. Amylin, however, remains controversial because it’s small. But Bristol-Myers Squibb (BMY), as we’ve mentioned previously, is hot on its trail, and we suspect other companies, with their limited pipelines, could easily make rival bids for Amylin. We personally would be disappointed to see the stock sell for less than $35 a share.
Getting back to neurology and the $1 trillion hole in the West’s economies, many companies have absolutely given up on developing new neurological drugs. But there are some exceptions: Eli Lilly and Company (LLY) is one. They have a drug in Phase 3 trials that could produce very strong effects on Alzheimer’s patients – and we’re not just talking about giving them the occasional glimmer of memory, but rather a chemical that can provide, if not a complete cure, then certainly something that really lessens symptoms across the board. Our guess is that this is at least an $8 billion opportunity, which could make up for almost all the drugs that Lilly is losing to generics, of which Zyprexa is the most important.
The results aren’t out, but will be presented some time this year. Clearly if Lilly succeeds, it could turn a dull dividend stock into a dramatic growth company.
Lilly has other positives: They also have a psoriasis drug, as well as a deep franchise in the diabetes area. While the company gave up its stake in Amylin, it is currently developing GLP drugs and has patents on other diabetes drugs.
Finally, in addition to the Alzheimer’s drugs, Lilly also has a franchise in the neurological arena. In addition to Zyprexa going off patent, so will Cymbalta, which had been the most popular SSNRI (Selective Serotonin and Norepinephrene-Reuptake Inhibitor – typically used as an antidepressant in the treatment of depression, anxiety disorders and some personality disorders). We wouldn’t be surprised to see Lilly reinforce this franchise with other types of drugs.
Another important factor with Lilly is that to a much greater extent than other drug companies it has the wherewithal to dramatically reduce its cost structure. One of the things we especially like about Lilly is that even if all its new drugs should fail, the company should still be able to maintain a very hefty dividend, which currently translates to a yield of 5 per cent.
And if we’re right that this company does have the best pipeline prospects, as with Novo Nordisk, it could become the next real growth company in the drug industry.
It’s so hard to find other companies that are really engaged in drugs that can move the needle, not just for themselves, but for the impact on human health globally.
Another stock to consider here, though much more speculative, would be Elan (ELN). In conjunction with Pfizer (PFE) and Johnson & Johnson (JNJ), this company is working on another Alzheimer’s drug which works in many ways like Lilly’s. We single out Elan because it’s much smaller than the other two, and the success of the drug could send the stock skyward. The same success would not move the needle nearly as much for the considerably larger Pfizer and Johnson & Johnson.
To sum up: Clearly there’s lots of room for improvement in the drug and healthcare industries, and again, this is true no matter what happens (or does not happen) regarding Obamacare.
It’s critically important to recognize that drug approvals cannot be held up for years or even ultimately be denied because someone down the line in the regulatory bureaucracy doesn’t have the required expertise in experimental design.
But until we get our act together, the best we can say is to focus on those few drug companies that really do have a chance to make a difference. Our favorites are Lilly, Elan, Novo Nordisk and Amylin.