Not that you need reminding, but a lot of things in the news have not been going well for biotech investing lately. Whether it was the Chairman of the Federal Reserve Bank of New York hinting that the sector might be overvalued, or Senator Waxman sending the shot heard round the biotech world via his letter to Gilead Sciences, it feels like many headlines have conspired against biotech stocks these last few months.  In the spirit of piling on, I’d like to add another thing you might want to put on your radar: last week’s Medicare data release.  The news did not make much of a splash in biotech circles, but I think it deserves to at least be examined from an investor’s point of view.

 

In case you are unaware of the story, here is a quick primer.  In the late 1970’s, a federal judge issued an injunction against the Department of Health and Human Services (known back then as Health, Education and Welfare) from disclosing reimbursement amounts that might personally identify individual physicians who provide services to the Medicare program.  Since then, various organizations have fought to overturn the injunction, and Dow Jones finally succeeded in doing just that in May of last year.  The ruling motivated the government last week to publish an unprecedented database that contains the number of services individual physicians performed in 2012, and the amount Medicare paid them.  It will likely end up being a regular exercise.

 

The reason this should be on your investing radar is because it has prompted many local news outlets to question individual physicians about why they are spending money on some of the drugs we invest in.  This article from the Sarasota Herald-Tribune is a good example.

 

Unlike when a patient picks up pills at a pharmacy (which are covered by Medicare through prescription drug plans), therapies that are administered by a physician are billed directly to them, and they then turnaround and seek reimbursement from payers such as Medicare.  With dollar signs next to their names in print, I have seen physicians put in a position to defend everything from how they administer the Gaucher drug Cerezyme, to the prostate cancer drug Provenge, to common rheumatology infusions.  Do a google news search for “Lucentis” and you will really see a lot of articles…and defensive eye doctors.

 

The question for investors is: will this in some way affect how various drugs are used going forward?

 

Before I answer the question, let me first say that I don’t think attacking the drug spending issue at an individual doctor level is a good thing for our country.  In my opinion, the government has done the medical profession a disservice by including the payment information.  Most physicians I know are honest and practice solely with their patients' best interests in mind.  To hold them responsible for the drug pricing issue, and potentially cause angst about how their decisions might be perceived in the local newspaper does not seem wise.  To be clear, the data release has already exposed a few bad actors, but I would ask why Medicare has not already gone after those people privately in the first place?

 

With that out of the way, I do think there is a chance this policy could indeed impact some drug revenues in the future. I can certainly understand why physicians would want to avoid being an outlier, so you might have to consider that dynamic when new specialty therapies come along that might put them on a list.  I’d be on the lookout for drugs that have a unique way of standing out on the balance sheets of physicians who use them, especially ones for which there is an alternative that is traditionally billed in a different way.  In other words, look for therapies that can, fairly or not, be singled out and questioned.  Some of the ones I have already mentioned above are a good place to start.  If they end up being truly impacted, it could easily turn into a slippery slope.

 

To be clear, I do not want to overstate the issue.  This is something that will likely take a long time to play out. Plus, the data release only affects a small subset of therapies that are administered to the medicare population by a physician.  However, it is one more thing for observant investors to keep on their radar.

 

If there is one thing overall you should take away from this, it is that there are many small items adding up that point in the direction of cost control.  It is an important concept for stocks because many bulls will tell you the base case is that there are currently no mechanisms on the horizon for public payers to officially control costs. They are technically right about that, but a fallacy in the argument might be the under-the-radar, unofficial things that could nudge us there a lot sooner regardless.  Whether it is Senator Waxman using the bully pulpit, or this issue of calling out physicians as the public face of spending, these things could certainly add up to start having a tangible impact on pricing and/or usage.  Set your net present value calculations accordingly.

 

To review, last week’s Medicare data release means a few things for investors.  First, take these under-the-radar things that could eventually affect the industry’s pricing power seriously.  They are starting to add up.  Second, try to formulate an idea in your head about which types of therapies could be impacted by future Medicare data releases. They will likely be ones that stick out easily when reading a physician’s annual bill alone. Third, valuing biotechnology companies is difficult, so you have to contemplate how a lot of different news items can potentially impact your holdings.  Maybe this particular issue will blow over in a week, but it is still smart to at least keep it on your radar and see how it unfolds.