BRK/JPM/AMZN healthcare tie up

[Cigarbutt]

One of the things I admire most about Mr. Buffett is his unique ability to act rationally, whatever the circumstances.
On the question of spotting opportunities, making "stupid" mistakes and buying stocks after significant price appreciation: "We've done it before".
Now, he is sitting on a pile and as far as I know, he hasn't pulled the trigger.
It is fair to say that BH would not bet against Amazon but they also would not invest in it at this point.
I think that represents a reasonable position.
https://www.cnbc.com/2017/05/08/warren-buffetts-one-word-answer-for-why-he-hasnt-purchased-amazon-shares.html

[John Hjorth]

Berkshire Website Announcement [2018.01.30].

After reading it carefully, I speculate, that is an idea shared between [Mr. Dimon and Mr. Combs] and Mr. Bezos, without having any idea about who initiated the contact.

Somehow one get the feeling from the announcement, that Mr. Buffett must have said to Mr. Combs something like "It's "your idea" [in the meaning : "It's your idea" or "You came to me with the idea"], so you do it.".

[tol1]

Does anyone consider a part of the US healthcare value chain to be unaffected by the tie-up? From pharma, PBMs, wholesalers, retailers - I just cannot see anyone not being squeezed.

[John Hjorth]

Somehow I personally consider this initiative an employer-owned PBM, that will be running on some kind of non-profit basis.

Attached is a part of note 1 from Novo Nordisk Annual report 2017 released yesterday. It's ludicrous. Gross sales af DKK 216 B, net sales of DKK 112 B, US rebates etc. alone of DKK 100 B.

Novo Nordisk diabetes US market share 39 percent. Very rough calculation of total potential savings [with a lot of short cuts with regard to not taking NVO product mix etc. into consideration], here assuming without diabetes pharmas earnings affected: Savings potential for diabetes alone ~ DKK 100B / 39 percent minus J/V internal operation costs ~ DKK 256 B minus J/V internal operation costs ~ USD 43 B minus J/V internal operation costs.

What US politics haven't been able to fix so far, will eventually be fixed by Corporate America.

[DooDiligence]

Does anyone consider a part of the US healthcare value chain to be unaffected by the tie-up? From pharma, PBMs, wholesalers, retailers - I just cannot see anyone not being squeezed.

DVA, you can't do dialysis online.

But then again, they're getting squeezed by Uncle Sam.

[Cigarbutt]

On the potential squeeze and potential transformation, we appear to be very early in the game.
There will be certainly pressure on the suppliers but demand will have a strong tendency to go up.

Potential winners may the ones able to position themselves to achieve satisfactory rates of regulated returns and gain market share. DVA seems to be a good example.

Simply getting to move at the speed of an elephant may be a comparative advantage to slow moving dinosaurs.
The "customer" cost/value proposition can be improved.

[longinvestor]

https://www.forbes.com/sites/brucejapsen/2018/02/08/cvs-health-ceo-on-amazon-berkshire-threat-weve-got-this/#be65822276ae

A partner or a fox in the hen-house?

[Cigarbutt]

A partner or a fox?

If your thesis lies on the assumption of more of the same, the CEO’s assessment is reasonable. I would say that this status quo reasoning reinforces a false sense of security, an ideology of cautionary principles and stationary states.

If your thesis lies on a coming disruption with many small, unknown and bold players waiting to deploy their ideas, given the opportunity, then the big-three announcement may signal that the door is opening.

It may be reasonable to think that Amazon will set up some kind of technology-based transparent marketplace for the providers and the “consumers”. Something like a consolidated middleman.

A relevant example is what happened with the transportation logistics revolution that occurred since the early 80’s, although few people realize it was a revolution and it is often a neglected factor in the economic growth of the last few decades. Transportation logistics specialized in maximizing efficiency at all levels: from the order, to temporary storage, to the coordination of carriers, transfers, warehousing and delivery. Most transportation firms (asset-heavy) have an in-house logistics hub but this side of the business has been somewhat overtaken by asset-lite specialized entities (CH Robinson, Expeditors, etc) who became sophisticated brokers (middlemen). Transportation is not healthcare but nobody would go back in time in the transportation industry. Transportation costs are way down and these specialized brokers have been very profitable investments.

My humble take on the article and on the position of the “industry” is that if they want to partner with the big-three project, I see it more as a Trojan horse situation. The crafty Odysseus was able to bring the horse right in the middle of the city of Troy. Not a technology expert but I understand that a “Trojan” is used in the techno area as a trick or strategy that creates a context where the “virus” is spontaneously loaded into a protected or secured bastion and then fashioned to induce the host to willingly activate and use it.

[Cigarbutt]

"Somehow I personally consider this initiative an employer-owned PBM, that will be running on some kind of non-profit basis.

Attached is a part of note 1 from Novo Nordisk Annual report 2017 released yesterday. It's ludicrous...

What US politics haven't been able to fix so far, will eventually be fixed by Corporate America."

John,

Your last post was a source of reflection and research.

This post lies halfway between this thread and Novo Nordisk (more on that later).

Concerning your non-profit basis comment, some say that this has been a key long-term characteristic of Amazon . Notwithstanding the "profit" part, because of Amazon, I keep receiving on my doorstep, delivered rapidly and reliably, affordable specialized equipment that comes from far away places. Somehow, I get connected with sellers and delivery people who otherwise would have been outside of my reach.

I started looking at Novo Nordisk. If I understand you well, you seem to imply that the rebates etc are rising and affecting NVO's profitability in the context of a challenging pricing environment. Politely submitted, in my present limited understanding, it seems that the "value" of an american diabetic patient remains still relatively higher than other patients in general (ie Europe) even if pricing there is felt to be more "publicly" regulated. It seems also that the rebates and others are not passed on to the end user (the one who needs the product).

Concerning your "fix" comment, It seems that what a lot of the present players are saying is: "if it ain't broken, don't fix it".

This cost containment issue has been around for a long time and pharmas such as Novo Nordisk have always managed to preserve (and even increase) their profitability so this is nothing new perhaps. To help assess the cost pressure trends, here's a link related to a hot off the press report. If short on time, read the executive summary, the conclusion and the other Bloomberg link which gets the flavor of the report.

https://www.whitehouse.gov/wp-content/uploads/2017/11/CEA-Rx-White-Paper-Final2.pdf
https://www.bloomberg.com/news/articles/2018-02-09/drugmakers-dodge-another-bullet-in-trump-s-drug-pricing-report

Government reports are, by nature, political (we don't want to get into that, don't we?) so issues may not assumed head on and the plan may change but, for what it's worth, my opinion is that 1-we may reach a point (soon?) when significantly more pressure will be applied on the profit margins 2-pharmas will need to "prove" the value of their products and 3-now there is an added component aimed at the reduction of "free-riding abroad".

I understand that Novo Nordisk has a focus on diabetes (and obesity). Long term, diabetes industry dynamics may be changed by revolutionary new products (who knows when but the discovery of insulin itself is instructive in terms of the difficulty to identify where threats will come from and when) and pricing pressures may increase. However, the diabetes "market" will likely increase (a lot). Thinking of morbidity and mortality, did you know that, despite what the healines say, the global percentage of people dying violently has gone down tremendously in the last century and now, relatively, more people die from direct complications of diabetes (which is mostly a preventable disease, at least type 2)? Sugar (excess) is dangerous. One would think that preventive measures may eventually decrease demand for diabetic meds but, if history is any guide, when tobacco products were determined to be deadly products, tobacco companies were on the eve of long term stellar returns.

Sometimes I wonder about the usefulness of these general discussions so, when I read more about Novo Nordisk and if I become bright enough, I may try to contribute to that specific thread.

Final words related to your "political" comments and a way to go back to the essence of this thread. Health care costs have gone up ++ and, in many ways, this is not sustainable (tapeworm argument). Two links below using essentially the same data and coming to vastly different conclusions. The first link suggests that governments are too intrusive. The second link (Baumol's disease) suggests that the high prices we pay for health care may be in correlation to our relative affluence.
http://www.aei.org/publication/chart-of-the-day-century-price-changes-1997-to-2017/
https://www.vox.com/new-money/2017/5/4/15547364/baumol-cost-disease-explained

[dwy000]

I was at a startup conference last week and the head of a new healthcare insurer was commenting on the announcement.  Take the source for what you will....but he raised a couple of good points.

He first questioned whether this would actually turn into anything meaningful.  Apparently the average Amazon employee stays there less than 2 years.  As the market shifts from fee-for-service to value-based-care that makes it a very difficult population to structure and price for long term coverage given you have 50% turnover in the underlying every year.  Also tough to apply pre-emptive health services that many insurers are focusing on.

The other point was that this is hugely beneficial for Amazon but he thought probably negative for everyone else.  The vast majority of Amazon's employees are under 40 years old.  This is the most desirable target group for insurers because they use very little healthcare and end us subsidizing the chronic care and older patients that account for over 80% of healthcare costs.  By pulling it's "cheap to insure" population out of the broader insurance environment and self insuring, Amazon is both saving cost for itself and increasing cost for the rest of the insured population. 

I have to assume JPM and Berkshire employee bases have much broader age ranges and less turnover but it was an interesting observation.