Tuesday, April 12, 2016

Uncertain Health in an Insecure World – 80

“The Big Short”

A meltdown begins with a house of cards.

Wall Street traders short a security (stock or bond) when they become convinced that the price will go down in the future. Usually, they have come to recognize a fundamental flaw in the market sector in which the security is traded. The shorting transaction is to borrow a stock from a so-called counterparty, sell the borrowed stock on the open market (for $100), return the stock to the counterparty at a future date specified for less than the selling price ($75), and walk away with the difference ($25).

In The Big Short movie (above left), the house of cards was illustrated by a tower of Jenga blocks with various credit rating symbols stamped on their sides (Aaa = immune from default, to D = default, above right). In the mid-2000’s, tranches of mortgage loans at varying risk of default made up mortgage-backed securities (MBS). MBS’s underpinned a larger investment target made up of diverse assets called a collateralized debt obligation (CDO). In The Big Short, many such CDO’s were simply a collection of poorly rated MBS’s on steroids. Shorters bought derivative contracts called credit default swaps (CDS) on the cheap, as insurance against a highly unlikely CDO collapse. Their insurance policies paid out big-time when the MBS-infected CDO’s collapsed.

Big Shorters take out theft insurance on someone else’s home in a low crime neighborhood, knowing for certain that a theft is about to take place.


Pharmaceutical company research is another major market in flux.

A decade of flat U.S. public bio-medical research funding, despite the political party in power, has combined with a shift in R&D investment from Big Pharma to smaller start-up firms. These smaller firms are often the target of merger & acquisition (M&A) and/or corporate VC activities. The pharma market’s volatility since 2011 is reflected by the fact that there were more company exits than entries. The explosion of biotechnology firms over the last two-plus decades has been truly remarkable, at both the scientific and business levels. Either working on their own or through licensing deals with Big Pharma companies, these emerging research powerhouses have created new drugs and diagnostics that frame the basis for precision medicine.

A recent paper in Drug Discovery Today by Sarah Kinch and Denton Hoyer reviewing the FDA’s approval of new molecular entities (NME’s, above in purple) through 2013, revealed a peak of 55 NME’s in 1997. More than 150 drugs have been brought to market as a small company’s sole NME. But there has been a recent decrease in the number of unique companies with approved NME’s due to the large number of M&A’s, repositionings and market exits.

Big Pharma companies like Celgene, Biogen and Amgen continued their strong new drug development and market introduction. Regeneron (NASDAQ:REGN, above) biotech stocks have paralleled this megatrend, buoyed by the success of two new small-market drugs: one for wet macular degeneration (aflibercept, Eylea®) and another for moderate-severe eczema (dupilumab). Despite recent intellectual property woes with its new lipid-lowering drug (alirocumab, Praluent®), REGN has produced five FDA-approved new drug assets in the past few years, more than the rest of this sector combined. Yet its share price (below) falls, like all the rest!

There are numerous Aaa assets in the biotech portfolio. But investing involves risk.

As evidenced by early 2016 being the worst NASDAQ Biotechnology Index quarter since 2002, with this sector’s market cap falling by -23%, a once broad advance is experiencing a real reversal. The entire biotech sector has been dragged down because of the bad acts of price-gouging specialty pharma player Valeant Pharmaceuticals International (although it is not part of the NASDAQ index). Other specialty pharma powerhouses like Endo International and Horizon Pharma (both traded on NASDAQ) were down 25-50% in the last quarter, as a result of a broad sell-off in this sector, due to fundamental concerns about the business model, resulting it its characterization as a “bubble” marketplace.

Today, the troubled tranche of specialty pharma assets taints the entire biotech sector.


Technology proffers the benefit of broadly-based human advancement.

Use of personal health information (PHI) technology is helping advance healthcare. But limited access to PHI data is reducing access to important health advances.

Patient privacy protections were passed into U.S. law in 1996 (HIPAA), primarily to prevent insurance company denials for pre-existing medical conditions. Electronic medical records (EMR’s) originally put into place for fee-for-service (FFS) billing and provider reimbursement purposes, are now the technological basis for healthcare system conversion to capitated risk contracts under Obamacare. The marketplace access benefits of this 2010 law are now positioning healthcare systems to convert into payers and accountable care organizations (ACO’s). Under Obamacare, ACO’s are multiplying and emerging as too not dissimilar from the access-limiting managed care insurers of the 1990’s.

Healthcare futurists like Dr. Eric Topol (above) consider PHI ownership to be a civil right. “It is important for individuals to seize ownership of their data in order for the real benefits of a new data-driven high-definition era of medicine to be actualized." Efforts are underway to connect highly diverse EMR systems and data repositories into a single platform, and make to made myriad systems more interoperable.

In this way, there is movement afoot towards “unknotting” the problems of PHI access, increasing the likelihood of precision medicine being put into action, according to Farzad Mostashari (above), former U.S. National Coordinator for Health Information Technology (HIT). Dr. Mostashari is now the CEO of Aledada (est. 2014), a VC-funded ACO network creation startup. Mostashari says Aledada will be “almost a turnkey solution” for those establishing new ACO’s to comply with new Obamacare payment regs.

These days, it’s not about patients seeing their doctor as much as who owns the patient’s data.

Growing concerns exist that the 21st Century Cures bill passed in 2015 by the U.S. Congress propagates “the same old measures to increase the spread and use” of PHI by private interests (i.e., insurers, Pharma, big data Cloud repositories), while taking control out of patients’ hands.  The associated patient-provider disintermediation trend has also resulted in frightening increases in physician burnout, depression, and suicide!

Healthcare information privacy advocates like Deborah Peel (above) note that the HIT infrastructure is “designed to produce problems forever.” It's a paradigm of programmed obsolescence – a system not scale-able for handling massive data sets, while putting the PHI of millions of patients at risk from accidental breaches and malicious cyberattacks. Washington D.C.-based MedStar Health (March 28, 2016) and other major U.S. healthcare systems are the latest victims of cyberattacks. A March 28, 2016 attack targeted emails and healthcare data. MedStar clinical units were denied access to patient data for days.  The practice of stealing data subject to return (ransomware) has emerged as a (likely) offshore strategy to extort money, before access to healthcare system operations and data are restored.

Deborah Peel has signaled another alarm, noting that “The promise of electronic health information was supposed to be to help with treatment, not to create massive, hidden business models where people are using your data for purposes we don’t even know about.” The entire U.S. healthcare system is highly leveraged on promises of security, policies for propriety and expectations of meaningful use for health improvement.

But none of these are in evidence.


Biotech firms have taken business risks to introduce important novel therapies into the market.

But troubled specialty pharmacy assets has imploded this investment portfolio. 

An unanticipated populist movement exists among patients demanding their PHI civil rights.

But the PHI market is consolidating to the benefit of a few private special interests.

In the Square, we are long on these two market sectors. But a meltdown is on… a theft is coming… and the house of cards is real.

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