All Rights Reserved © 1999 Thomas W. Day
Medicine and it's associated hardware are the aerospace industry of the 90's. Don't believe me? Just look at the relationship. The government is the primary customer (52% of all "insurance" coverage issued as of the 1997 census), through Medicare and Medicaid, military, and government benefits. The national health costs are expected projected to total $1.3 trillion and reach 14.3 percent of Gross Domestic Product (GDP) by Y2k. $594 billion of this cost will be paid directly by public financing. $723 billion will be paid for by private sources, but a substantial percentage of the "private" funds are actually purchased with public funding, via military and government employee insurance coverage.
The only portion of the country's medical costs that is absolutely privately financed is $222 billion of out-of-pocket payments. The government never pays for anything out-of-pocket. Since cosmetic surgery gets wrapped into "medical" cost statistics, it's probably not hard to figure out where most of that $222 billion gets spent.
So, it's a fairly safe bet that either the government is paying the bill or it's plastic surgery for rich geeks. Sounds like the military-industrial complex, doesn't it? Either the government is buying their products or it's gangbangers, terrorists, or drug cartels. I wonder how many of the second group needs cosmetic surgery?
Whatever. The real deal is, the medical industry has its hands into the same ultimate deep pockets as their aerospace predecessors. Boeing, Harris, McDonald-Douglas, Fairchild, GE, General Dynamics, and the rest of those now-burnt-toast companies gorged on public funding until they popped. Popped they did, though. When that brand of corporate welfare ran out, so did the gangsters who profited from it. It would be interesting to see how many of the escapees, who didn't take the bank with them, ended up in medical device and drug companies.
As investors, this is the reason we all have to closely monitor these investments. If you think have found a medical device company that is running efficiently and producing products that sell for something resembling a real-world price, you need to look again. From the incredibly fat cats at the top to the field personnel, these companies don't spend a penny where a dollar will do. This is the home of limos for every excuse, thousand dollar lunch meetings, expensive booze on every occasion, expensive cars, multi-million dollar stock options and golden parachutes for the totally incompetent, and money spent like Y2k (or the next three-day weekend) is the end of time.
Just like the bomb manufacturers, the differential between the haves and the have-nothings, power-wise, is as wide as the spectrum of what Danny Quayle doesn't know. The execs are packing their pockets and golden-parachuting their way into mansions on the cliffs of Mendocino and the beaches of Hawaii. All the while, folks on the assembly lines might as well be knitting labels on sweatshirts or picking cotton, since corporate affluence only trickles down when it slips through the executives' fingers. This is always a sign that no one's building a business that's expected to last long enough for the cement to dry.
A short attention span is the shape of the industry. These aren't companies that spend time worrying about the distant (more than six months') future. The "big picture" is being painted today and tomorrow may require digging a whole new gold mine. The little companies are hoping to slither through their clinical trials and get bought up by a big company. The gangsters who run the big companies hope to get through the next couple of quarters with their stock options and bonuses intact. Once they bank their payoff, who cares if the business swirls down the drain? If the check didn't bounce, the millions the executives rake off of the top will set them up for a lifetime of luxury. Did you expect them to go job hunting afterwards?
On the fringes of corporate maneuvering, the FDA looms over everyone and those dreams of massive independent wealth. One significant product recall and the whole show goes down the tubes. Stock analysts are totally incapable of knowing anything about this aspect of a stock's value. In fact, the most important criteria for a medical product company CEO is how well he can lie about rumors of product problems. The second most important ability is hiring an idiot who will take the fall if the inspectors with the handcuffs show up looking for someone to blame for the latest homicidal product screw-up. The only way to get advance notice of this sort of impending disaster is to work in the bowels of the company's Reliability Assurance Department. Is your financial security worth that kind of sacrifice? Even the FDA's inspectors rarely go into those dark and depressing places.
Even if the company isn't run by a pack of Mike Milkin and Charley Keating clones, the future is beating hard on the door of this industry. Someday, a manipulated strand of DNA will put all kinds of implantable devices out of business. Pacemakers, ICDs, stents, catheters, and all of the cardiac paraphernalia could become ancient history with one good breakthrough. The same goes for dialysis equipment, transplant technology, cochlear implants, and, even, drugs. What's gold today could be dust tomorrow. And tomorrow could, literally, be tomorrow.
These are the reasons that knowledgeable analysts (if they still exist) consider medical device companies "high risk." The bubble could break, for a half dozen very good reasons, on any company at any point in the near and far future. This may be the ultimate in "buyer beware" in the stock market.
August 1999
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