Cost containment as a stimulative force.

• Position: Chairman's Agenda: Managing Health Care Costs - Panel Discussion

A roundtable discussion with health care analysts on the cost-control movement and other competitive forces sweeping the industry.

One constituency keenly interested in the cost-containment issue is the investment analysts who cover the health care industry. Directors & Boards met with five representatives of the analytical community to add their perspective to this edition's examination of health care cost management. Participating in the roundtable discussion were:

-- Viren Mehta, Patner of Mehta & Isaly, which provides research and investment advice on the pharmaceutical and biotechnology industries to individual and institutional investors.

-- Sam Navarro, Medical Technology Analyst at Needham & Co., the investment banking firm, where specializes in the devices and supplies segment of the health care marketplace.

-- George D. Pillari, a co-founder and Chief Executive Officer of Health Care Investment Analysts Inc., a Baltimore-based information company that, through its data bases and publications, tracks the hospital and nursing home sector.

-- Barbara A. Ryan, Vice President and Senior Drug Analyst in the Equity Research Department of Prudential Securities Inc. She has been covering the drug industry since 1981, with a focus on both the major pharmaceutical companies and smaller special-situation firms.

-- Martha Ventilla, Executive Director of PH II Inc., an investment banking firm in which she specializes in financing and merger advisory work, often with a cross-border focus, for biotechnology and pharmaceutical companies.

Excerpts from the discussion follow.

Directors & Boards: Let's start by looking at one major segment of the health care industry -- the pharmaceutical business. The cost of drugs is a controversial issue. What are we as nation spending on drugs?

Barbara Ryan: Total spending for drugs is on the magnitude of 8% to 10% of all health care expenditures.

George Pillari: Ten percent is well over $70 billion.

Ryan: Right. But people will sometimes say, |Why worry about drug prices, because it is such a small piece? If it is 10% and you lower it to 8%, so what? You have to focus on the other 90%, which is the doctors or the hospitals.'

D&B: It is a very visible 10% because many people have to pay for these prescriptions out of pocket.

Ryan: Another factor is that we re all on a continuum toward the age of 65, and it is at that age that drugs costs are very significant. For patients over 65, the drug portion of the total costs of health care is 35%. You never meet a person over 65 who can't recite to you every single prescription they take and how much it cost last week and the week before that. And many elderly people live on cost-of-living increases.

D&B: How has cost containment begun to impact the pharmaceutical industry?

Ryan: It pervades the competitive environment. A lot of changes are being forced on the industry by corporate managements, because they are paying the bill. Corporations are banding together globally to reduce their health care costs and, as such, the buyers have become large institutions, and the individual doctor, who has been the traditional target of marketing, is less important. The influx of managed care is the competitive force driving the industry now.

If you have a litany of products in one therapeutic category -- let's take arthritis, where you have some 15 products which are not terribly distinguished from each other -- those products are slowly going through a commoditization process among managed-care buyers. What the industry must do is come up with truly unique products. Historically, if you look at the industry, many companies were very successful whether they did groundbreaking research and developed unique products or whether they just developed a host of |me too' drugs. The rewards for the research dollars spent were still very high in either case.

Now, the onus is on the pharmaceutical companies to show the cost-effective features of their drugs, and clinical trials must be designed with this in mind. No longer do you design a clinical trial to show merely safety and efficacy, but you must also show that the new drug is more effective than either currently available other drugs or other treatments, such as surgery.

The companies that develop unique value-added products will get rewarded and will have the money to continue to put toward research. Those companies that can't are either getting merged or doing joint ventures to acquire technology. The consolidations, mergers, and joint ventures that we have seen to date show that the competitive structure of some companies is very inadequate for the world that we are moving toward. There have been companies in the industry that have spent, cumulatively, billion of dollars research and yielded nothing but a bunch of me-too kinds of products. Clearly, those companies...