In my Feb. 24, 2009 blog post Economic Crisis Will Lead To More Efficient Healthcare , I made the prediction that our current, inefficient model of healthcare would be forced to change as a result of deteriorating economic conditions.

Recently, a scholarly paper by Christopher Truffer and colleagues, Health Spending Projections Through 2019: The Recession’s Impact Continues , presents compelling data to support my prediction from a year ago.

In the paper, the authors write “National health spending [in the U.S.] is estimated to have grown 5.7 percent and reached $2.5 trillion in 2009, despite a projected 1.1 percent decline in gross domestic product… This projected rate of escalation would represent the largest one-year increase in the health share of GDP since the National Health Expenditure Accounts (NHEA) began tracking health spending in 1960, and it reflects the severity of the recession that began in 2007.”

Interestingly, the authors see healthcare expenses rising from 17.3% to 19.3% of GDP by 2019. To arrive at this estimate, they modeled GDP as rising from $14.3 to $23.3 trillion by 2019, in other words a 5% growth rate of the economy, each and every year. By contrast, real economic growth in the U.S. has averaged just 2.9% a year over the past decade. Assuming a continuation of the past decade’s economic performance leads to a more realistic estimate of $19 trillion for the GDP in 2019. Thus, if healthcare continues to grow at the current pace, then healthcare expenses could actually be 23.5% of GDP by 2019.

Or worse. Suppose the U.S. experiences prolonged economic stagnation, perhaps similar to what Japan experienced from 1991 to 2003 when its economy grew at a mere 1.1% annually. Under that scenario, healthcare costs could rise to 28% of GDP, representing a staggering 62% increase in the share of GDP attributable to healthcare.

Few bets are safer than this one: one way or another, healthcare is going to get reformed. And the only way that reform can deliver the needed cost savings is to shift the focus of healthcare delivery from a critical care model to a pro-active, preventative model.

Good news, if you’re in the early disease detection business.

Yours truly,
John

Bill Pimco, co-founder of Pacific Investment Management (PIMCO), is one of the world’s largest mutual fund managers. In his February newsletter to investors, he had this to say about Canada: “…given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country.”

He presents a very interesting chart to illustrate his concern, entitled “Ring of Fire”.

The chart depicts country risk as a function of both public sector deficit and public sector debt. On his chart, the dot representing Canada is coloured yellow, whereas the red-dotted U.S. is planted firmly within the “Ring of Fire”, alongside big debtor countries like Japan, Italy and Greece. Although Canada’s (public) debt-to-GDP is only slightly lower than that of the U.S., Canada has a much more favourable deficit-to-GDP ratio.

But recent research by McKinsey Global Institute and others reveals that a better determinant of country risk is total debt (public + private). And on this score, it’s not even close. While the total debt of the U.S. peaked at 375% and currently stands at a daunting 370% of GDP, the same measure in Canada is (only?) 245%.

So what other advice does Bill Gross share with investors in his letter? Again, in his own words, “the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors.” (In case you’re wondering, the total debt-to-GDP figure for the U.K. is a staggering 470%.)

While it would be foolish (and uncharacteristic) for Canadians to brag, we can nevertheless breathe a collective sigh of relief, because the worst of the economic storm is likely to bypass us.

Yours truly,
John

By popular demand, this week marks my return to regular blogging. I know many of you are keenly interested in progress at Picomole. All I can say is it’s been a very busy time, but I’m happy with where things are heading.

I thought I’d kick things off in the New Year with a topic that’s near and dear to my heart: deal flows and trends. One of the tools we rely on at Picomole is our compilation of deal stats. What’s especially interesting is that we’re starting to see some new trends emerging, based on our survey of deals in the medical device and diagnostics industry.

First of all, M&A deal volume is up dramatically for Q4 2009, with no fewer than 33 deals announced, compared to just 13 for Q4 2008. Total aggregate size of the deals for which financials were disclosed increased to over $3.4 billion in Q4 2009 from $2.6 billion one year ago. No big surprise there, these data just demonstrate that economic activity is returning to normal levels in the medical technology sector.

When we looked at company financings during the same time periods, the biggest trends that we noticed were the dramatic shift in interest away from cardiovascular diseases (Q4 2008) to a focus on cancer (Q4 2009). In Q4 2008, we found 5 financing deals in cardiovascular disease, with 4 disclosing financials valued at $56.5 million total. During the same period, no important cancer financing deals were identified. In Q4 2009, we found just 2 financing deals in cardiovascular disease, valued at $2.3 million. Meanwhile, we tracked 4 cancer financing deals, with 3 disclosing financials valued at $57 million total.

While it’s tempting to leap to conclusions (e.g., cancer is in, cardio is out), we have to caution that there is a fair amount of granularity in the data. Also, past trends are often not reliable indicators of future direction. However, the data do suggest a significant change in priorities, and that may mean an even brighter future for cancer-focused medical technology companies.

Food for thought, as we embark on an exciting new year of deal-making!

Yours truly,
John

Healthcare reform in the U.S., widely recognized as essential, represents threats to some and opportunities to others. While considerable concern was expressed about the biotechnology sector at a recent investor forum I attended in New York, investors see medical devices in a more positive light.

Below is an excerpt from the remarks of Mr. Paul LaViolette, Venture Partner, SV Life Sciences, who participated in the keynote panel at Elsevier Business Intelligence’s ‘IN3 East’ Partnership/Investment Meeting for Medtech Execs held in Boston on June 23-25, 2009:

“Generally speaking, medical devices as a category are not likely to be targeted, and it is likely to be part of the solution, in my view. The less-invasive revolution is going to continue for a long time. It is a means by which to provide cost-effective care. There are huge categories of disease that can be positively affected by this. Large companies are not going to innovate, generally speaking. They are still going to need venture-backed vitality to drive the engine of growth in devices. So I think we need a little bit of stabilization in the concern about what the health care system reform will entail. I think devices as a general space will be healthy, and that the venture-backed model is going to be absolutely requisite in that paradigm.”

Mr. LaViolette also echoed other panelists regarding his perspective about the drought in medtech IPOs. “It is a lot harder to innovate diversification than it is to acquire it,” said Mr. LaViolette. “So if you talk to the leaders across the device industry – and I do that routinely – every one of them contends that they will be more active on the M&A side over the next three years than they have in the last three years. I think it’s nice to have an IPO market, but that’s not really a hugely vital part of the exit strategy for most categories of medical technology, and I don’t think that an IPO market for devices matters that much.”

Yours truly,
John

In an interview aired today with C-SPAN host Steve Scully, President Obama made a rather startling admission: the U.S. has run out of money. Of course, this isn’t really surprising to anyone with a passing knowledge of the state of U.S. finances. But it is nevertheless shocking words to be coming from a sitting president, and one that could further roil global markets in the days and weeks ahead.

A brief excerpt is below (emphasis added):

SCULLY: Yet, it all takes money. You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.
So we've got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it's putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.
So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don't reduce long-term health care inflation substantially, we can't get control of the deficit.
So, one option is just to do nothing. We say, well, it's too expensive for us to make some short-term investments in health care. We can't afford it. We've got this big deficit. Let's just keep the health care system that we've got now.
Along that trajectory, we will see health care cost as an overall share of our federal spending grow and grow and grow and grow until essentially it consumes everything. That's the wrong option.
I think the right option is to say, where are the game changers, the investments that we can make now that are going to reduce costs, even if they don't reduce them this year or next year, but 10 years from now or 20 years from now, we are going to see substantially lower costs.

A transcript of the full interview may be downloaded here.

My take is that this is a trial balloon floated on the Memorial Day long weekend (when relatively few viewers will have seen the Obama interview), perhaps to gauge reaction to this frank assessment of the seriousness of U.S. finances. The interview suggests the Obama administration will target healthcare cost reductions as part of its strategy for tackling the soaring debt. But even more interesting is Obama's willingness to find the "game changers", which could be interpreted to mean new disruptive technologies, like Picomole's LifeSens breath analysis technology.

As I've stated here before, the key to reducing healthcare costs while improving clinical outcomes is to shift the focus from crisis care to preventative care and early detection. Sounds to me like President Obama may be prepared to consider just that.

Yours truly,
John

Canadians may complain a lot about the global competitiveness of our businesses, but you shouldn’t be fooled by all the grumbling. In reality, the business environment here in Canada is among the best in the world.

According to the Economist Intelligence Unit, business information arm of The Economist Group, which in turn publishes The Economist magazine, Canada is actually ranked #4 in the list of countries with the most favourable business environments, after Denmark, Finland and Singapore.

By contrast, the U.S. is currently ranked #10, and there is little doubt it is about to tumble further down the list. Bogged down with enormous shortfalls at all levels of government, taxes in the U.S. are on their way up whether Americans like it or not. In what is just the most recent attempt to close a multi-billion dollar budget deficit, New York has leapt ahead of California in the dubious game of Who Has The Highest Taxes by announcing 88 new taxes . Expect to see many more stories like this from the U.S. in the months ahead.

My experience has been that there is relatively little red tape to running a business in Canada, and tax rates are lower here than they are for our friends South of the border. But don’t just take my word for it. According to the 2008 KPMG report Competitive Alternatives: KPMG’s Guide to International Business Location , Canada has the third lowest tax cost for businesses among 10 countries studied, with a total tax burden a whopping 21.2% lower than the U.S., which came in at #5 in this study. Moreover, under the industry category of Medical Devices, Canada ranks #2 in the overall cost index, trailing only Mexico.

Something to think about the next time you’re standing in a long line at Tim Hortons, or digging out after a winter storm in April.

Yours truly,
John

I hate to sound like I’m repeating myself (see my previous entry A Case of Overexposure ), but this just came across my desk. According to a recently-released report by the Canadian Centre for Policy Alternatives entitled “ What’s in a Scan? ,” Canadians may be putting themselves at risk with expensive screening tests based on medical imaging techniques:

“Controversial medical imaging procedures are being marketed and sold to Canadians as effective in screening healthy people for early detection of specific diseases, even though such screening is expensive, potentially harmful, and neither supported by the scientific literature nor recommended by professional bodies and regulators.”

The report goes on to quote Dr. Brian Lentle, former head of the Radiological Society of North America:

“Any radiation exposure is assumed to cause harm in older people beyond the reproductive age. The harm from screening procedures is radiation carcinogenesis – cancer induction. Such cancer induction is related to dose and dose-rate in a linear or linear-quadratic way that is explicit at high doses. There is no safe threshold that can be inferred. The evidence for harm at lower doses is less strong, but such harm may be reasonably assumed in the conservative practice of radiation medicine.”

Unfortunately, the report concludes that the public seems to be misinformed when it comes to the risks associated with some increasingly popular forms of medical imaging:

“People largely think scanning is safe (60% of our survey said that they thought there were no risks or safety issues associated with CT scanning or that they didn’t know of any) and erroneously believe (63%) that CT scanning exposes you to less radiation than conventional X-rays.”

At Picomole, we believe that the future of screening tests lies with a truly non-invasive and safe approach: analysis of exhaled breath samples. Our LifeSens breath tests are simple, fast, and do not expose the patient to any radiation risk whatsoever.

For more information, contact us today.

Yours truly,
John

A newly published report by the National Council on Radiation Protection & Measurements (NCRP) reveals that Americans are now being exposed to more than seven times as much ionizing radiation from medical procedures as was the case in the early 1980s. According to the NCRP report, the alarming increase in exposure was due mostly to the higher utilization of diagnostic imaging procedures.

The health risks due to radiation overexposure are not insignificant. A recent paper in the Journal of the National Cancer Institute concluded that women with BRCA mutations (a group that is at high risk for breast cancer), should not receive annual mammograms before the age of 35 due to the risk of developing breast cancer from cumulative radiation exposure. Computed tomography (CT) scans, increasingly used in the diagnosis of lung cancer, colon cancer, and many other diseases, expose patients to relatively high levels of X-ray radiation. A chest CT, for example, exposes a patient to about 8 millisieverts of radiation - 80 to 400 times the radiation exposure from a chest X-ray.

Moreover, not only do diagnostic imaging techniques like mammography and CT expose patients to potentially dangerous amounts of ionizing radiation, but the costs are spiralling out of control. A recent study by the U.S. Government Accountability Office (GAO) in July found Medicare spending on medical imaging doubled to about $14 billion a year between 2000 and 2006.

Picomole’s LifeSens technology does not expose patients to any radiation, and offers a fast and cost-effective way to potentially screen for diseases like breast cancer and lung cancer by measuring disease-specific biomarkers in exhaled breath. If a LifeSens breath test indicated the possible presence of a particular disease, then a suitable imaging technology could be used to ‘see’ the problem, as is being done now.

We believe our LifeSens breath tests can be an integral part of the solution for containing soaring health care costs. Let us know what you think!

Yours truly,
John