As I have written before, I do not consider myself to be a visionary. In fields that I know best, like healthcare, I feel like I have a better rear view mirror than the average person and a reasonably clear windshield. But, my crystal ball is usually quite foggy. As a result, I think I generally do a good job of interpreting history and projecting near term events. But, I seldom see the big future. But, this morning, as I read my copy of Medical Device Daily at the gym (have you read yours today?) I had one of those rare moments where my crystal ball became super clear. And, I damn near fell off my elliptical.
Before I tell you what I saw in my crystal ball, let me lay down some context, some of which I’ve written about in prior posts about healthcare. In the current healthcare debate, two of the easiest targets have been manufacturers of drugs and medical devices. They are easy targets because the liberal media have trained us to be anti big company and many of these manufacturers are big companies. And, their products are expensive. As a general matter, I find that tragic given the positive impact medical innovation has had on our lives and the immutable fact that novel drugs and medical devices save the system money by keeping patients healthy and out of the hospital, where the real money is spent.
There’s a broader point that is missed by almost everyone in the healthcare debate. We hear over and over about how much more the U.S. spends on healthcare, especially drugs and medical devices, than other developed countries. But, nobody ever explains why this is the case. That’s unfortunate because the explanation is incredibly important to the future of medical innovation in the United States as well as the rest of the world. For the last 50 years or more, the United States has paid for basically ALL of the medical research and development for the entire world, through higher drug and medical device prices. In case that’s not clear, let me break it down for you. Getting a new drug to market is a very expensive proposition. Many studies have put the number as high as $1 billion (with a “B”), including all the many failures that precede success. Somebody has to invest R&D dollars to pay for this and there has to be an acceptable return on the capital. The only way to get an acceptable return on that capital is to price the drugs at a level that provides an acceptable stream of cash flow over the patent life of the drug. Here in the United States, we have paid those prices. The Canadians, the Swiss, the French, and the Brits have all drafted on the R&D paid for by our higher prices by paying lower prices in their respective countries. Had the United States paid the same prices over the past 50 years as the French, we would have far fewer life saving and life extending medicines and devices.
If you’re still having trouble grasping this concept, allow me to offer a simple analogy. Do the Canadians, French, or Swiss invest enough in their militaries to defend themselves should an all-out war threaten their safety? Hells no they don’t. Why not? Because, for the last 50+ years, the United States has invested very heavily in our military and the Canadians and Europeans know that we will defend them if the shit ever really hit the fan. That’s the promise we made when we entered into NATO. Well, about the same time we entered into a defense NATO, we started developing an implicit drug and device NATO. We pay, they benefit. I’m not saying this is good or right, but it is real and ignoring it in the current healthcare debate is every bit as dangerous as ignoring 50 years of military and foreign relations history.
Now, let’s consider the implication of the Obama administration’s efforts to move us to a single payer system and its attendant pressure on drug and device prices. In fact, let’s specifically consider the implications of lowering drug prices in the United States to, say, Canadian levels. It’s actually very simple. Research and development disappears. Gone. Name me a single Canadian drug company that conducts R&D. There aren’t any. The large Europe-based drug companies fund R&D by selling in the U.S. If we head down this path, we will have the drugs we have today and nothing more. Innovation stops. If you’re, say, 50 or so (like I am), that should scare you.
Before I get back to my epiphany at the gym this morning, I need to share one more contextual piece. If, for some bizarre reason, you have not been reading Medical Device Daily on a regular basis, let me tell you what the big medical device companies have been doing for the past few years. They’ve been focusing on China. They see one billion potential new customers in a country with growing prosperity and they are strategically focused on China more than just about anything else. Two of the biggest orthopedic device companies, Medtronic and Stryker, each acquired a Chinese orthopedic device company in the last 12 months. I’ve watched this develop with some amazement because I have actually done business in China. I co-founded a venture capital firm to invest in China in 1999 and spent a lot of time over there. My lessons from that experience make one thing very clear to me. As China becomes more prosperous and their citizens get more and better access to advanced healthcare technology, the odds that the big winners will be large American medical device companies is identically zero. It just ain’t gonna happen. The Chinese government will, I’m sure, be more than happy to have the U.S companies teach them the ropes, but the spoils will go to Chinese companies in the long run. Maybe Medtronic and Stryker think they can thread that needle by acquiring local companies, running them independently, and sneaking the profits back to the United States. Maybe – I doubt it.
OK, finally, back to my early morning revelation. The front page article in MDD this morning was titled “Chinese Med-tech Firm Seeks to Win in China, Then Disrupt U.S. Market.” Last November, as I mentioned, Medtronic acquired Chinese Orthopedic company China Kanghui Holdings. Medtronic’s vision was to provide a channel to sell their products in China. But, something interesting has happened on the way to the Chinese market. To quote from the article:
When the deal was first reported, Medtronic emphasized that the transaction would accelerate its globalization and improve its position in the global orthopedic market. The news release also noted the deal would support Kanghui’s further expansion in China and other emerging markets. But just over four months from that acquisition announcement, the two companies now say they are aiming for a much bigger target with Kanghui’s low cost products: Medtronic’s home turf, the U.S.
Are you starting to see what I saw in my crystal ball? Not only does the Chinese government have no interest in importing medical devices from big U.S. innovators into China. This is all about providing a channel to bring cheap knock-off medical devices from China to the U.S. The timing is perfect. Just as Obamacare and the liberals are demonizing the price of drugs and devices, the Chinese show up with cheap drugs and devices. I’m not suggesting these products will be unsafe and seniors will have their artificial hips fall apart like a crappy toy made in China in the 1970s. In fact, Chinese manufacturing has become very sophisticated and the U.S. FDA will likely ensure the quality and safety of these products. But, and if your attention is drifting, tune in now, these will be medical products that are several generations behind the more innovative products currently available. And, of course, all future innovation will cease.
Time to pause and think through what’s going on here. The Obama administration has fertilized the soil for cheaper, less innovative medical products to come into the U.S. market. With a stroke of the pen, when he signed the (Not)Affordable Care Act into law, Obama paved the way for cheaper, less innovative medical devices (and likely drugs at some point) to enter the country and…you ready for this….for the last successful manufacturing industry to move to China. For all the claptrap Obama spewed during the campaign about Mitt Romney’s Bain Capital investments moving jobs overseas, he has single-handedly made it not only possible, but likely that the medical device manufacturing sector will quickly move to China and be controled by Chinese companies.
For decades, the United States has been home to phenomenal medical innovation. Yes, it has been costly, but I think most would agree that it has been worth it. Indeed, the entire world has benefited. Anyone who has had a loved one suffer from cancer, heart disease, or some other serious disease knows this. Now, without even realizing what’s going on, Americans have positioned themselves to dramatically curtail medical innovation, cede a major industry to the Chinese, and move thousands of high paying manufacturing jobs to China. Quite a vision. I wish I hadn’t gotten up to go to the gym today.