Shorting the Obama Health Plan

Barack Obama is proving to be a masterful president just six months in office. I am not talking about policy or legislative initiatives - the first role of any president is to lead and he has led the nation from a sense of panic - perhaps panic itself - to calm - real calm. He has been wildly successful, regardless of what the "paid to scream" pundits in the conservative and financial media may say about him.

And now that calm is here, and his policies and proposals are more rather than less important than his ability to re-assure the American people about their own strengths, it may be time to, metaphorically and literally, short Obama. Specifically his health plan, whatever shape it may take. At least some of the profits can be used to pay the extra taxes we are going to pay for next 25-50 years. (For purposes of full disclosure, I voted for Obama.)

The problem for Obama, and why it is possible to develop a short view of his administration going forward, is his loss of control of Congress. Most Senators and handful of Congressmen know something of money, the budget, deficits and markets. But most members of the House do not - and they are showing way too much influence and power in the setting of policy. That means a make believe energy bill/cap and trade bill, because they don't want the cost of energy to go up; too much support for a housing market that would best be left to itself, to correct itself quickly; and a health care bill that has its heart in the right place and its head up, well, this is a family blog - a health care bill that sets the nation on an untenable course.
And that is where it is best to start looking for short and long opportunities - health care. Health care bill will probably pass; it will probably mandate everyone have or buy health care insurance; it will include thousands of pages of regulations that will not work as planned; it will be based on cooked data about cost reductions that will never happen; and when it all gets too expensive, 12-18 months after enactment, medical care for those dependent on the government will be further rationed and medical care paid for by the private sector will become increasingly expensive as private payors subsidy of government programs increases. And then 3-5 years after that, something will blow, led by the need for Medicare to dip into the general tax fund, roughly around 2016.

Short something that will blow up in 2016? No.

But look at short positions in companies that will be first in line to be seriously squeezed - some with merit, others not.

Who will be squeezed? And when?

The squeeze will begin about six nanoseconds after the health care bill is passed and the remaining responsible adults in Washington - there are a few - take a look around and go "omigod." They will be seeing an obese, aging population unwilling or unable to take care of itself hurtling towards government paid health care with frightening speed. And an industry still used to printing money at will with new products or fees and in control of their local Congressman or Senator. And they will go after the unusual suspects first -- and then some not so usual ones.

So, who gets squeezed?

Big Pharma: I follow the industry more closely than most, used to write a biotech letter, Big Pharma was my comic relief whenever I got too serious. This industry deserves to be squeezed if not on economic principles but everyday idiocy and a total inability to match real consumer needs with their business model and product development. For example, if you talk to doctors, the best proton pump inhibitor around is Aciphex (I take it, it changed my life, no kidding). It runs almost $300 a month without insurance while generic Prilosec costs less than it does to feed someone at Chipotle (well, maybe not my sons). If ihad the best product, I would hire the right people and go head to head with Prilosec. Nope - just jack prices and milk profits until the patent runs out. And this is the preferred mode of business in the entire, traditional Big Pharma industry. And Congress knows this as well - so you can expect a big squeeze on drugs that do not directly save lives. For short sellers, this intersects with the greatest, most cost saving patent expiration ever - Lipitor, November 2010 - so take a hard look at Pfizer. They are facing a revenue downturn of up to $9 billion in Lipitor sales within 12-18 months of patent expiration. That would require 9-10 blockbusters to emerge - and they have none in the pipeline worth mentioning. In my book Sell Short, which is about process, not specific recommendations, the Lipitor expiraton and Pfizer are central to explaining how one can find and use great short opportunities. (check out MichaelShulmanSellShort.com for more info.)

Other candidates? I have a personal bias against the frequently overprescribed Aranesp and Procrit (an anemia drug) from Amgen - way overprescribed compared to Europe, where people typically live longer. Mind you, Pfizer and Amgen print cash, they are simply overvalued and it will take a while for the market to catch up with them. Between the two of them, and hundreds of billions in R&D over the past twenty years, they have produced, I believe, one blockbuster in their labs.

Devices: Medical devices routinely get approved by the FDA - when effective - then a hyperactive sales force pushes them onto the market and patients pay for them. The 10% better widget results in a 100% increase in fees to the hospital or center - endorsed by Medicare, who sets the price for the new procedure that is copied and used as a floor by the private sector. Well, according to Bob Dylan, the "times they be a changin." It is easy to see Medicare and then insurance companies balking at new devices that sell well here, barely sell in Europe and do little to actually improve patient outcomes. This includes services for treatment and for diagnosis. Who look ripe for trouble? Medtronic. Unlike Pfizer and Amgen, this is a well managed company with a great product development organization - but they are in the wrong place at the wrong time and their size means they need a great deal of success with new products to move the needle on sales and continue as a growth company. Other losers are the big imaging players - GE, Toshiba and Siemens - but these huge multinationals are so diversified you cannot consider shorting them based on this thesis alone.

Payors: Stay away - long or short - who knows what is going to happen to them.

Providers: Ditto for providers - price pressures will be offset by increased business and reduced or eliminated bad debt - but a lot of their billing nonsense is going to get squeezed - a friend was just billed $26 for one spoon of Pepto Bismol - impossible to say where this will end up.

Biotechs: If you want to go long, look at the great biotech's will real live saving products and start with Gilead Sciences. Bets managed biopharma company on the planet - by a mile. They own the HIV marketplace and are pushing into pulmonary and also have a promising, high risk hypertension drug. They are also a great stock to hedge - very high premiums on their calls. If there is a buy and hold company left on the market, they are it.