Healthcare sector looks ill

The South Africa victory not only puts a chink in the considerable armour of the big pharmaceutical multinationals, it indicates something local investors might need to take account of: a stakeholder backlash against healthcare corporations.

There are three basic areas where the backlash is most likely to be focussed: genetics, pharmaceuticals, and vertical integration.

In the first, genetics, the ethical dilemmas are perhaps more numerous than in any other area. Few would deny that some genetic research has its qualitative upsides, the fact that it is almost exclusively driven by giant, profit-seeking corporations, leaves some feeling less than enthusiastic about their introduction. The absence of a global, nation-wide, or even industry-wide, set of enforceable regulations for corporations seeking to gain from genetic technology has left a considerable gap in the system. A large number of stakeholders, including possible users of, and investors in, the new science, are unwilling to accept to developments unless this gap is filled.

In genetics, the main issue is perhaps less the science itself, but its application. Many fear that, with the profit-motive the dominant force, genetics will be used more to serve the agendas of the rich and powerful and less for those needy of improved healthcare. Cases of employers running genetic scans on potential employees, and allegedly not selecting those with genetic 'defects', and of wealthy expecting parents wanting to tamper with the genetic code in-vitro to produce the 'perfect' child are already emerging. This week it was revealed that babies in the US have already been born carrying genes which have been intentionally modified.

The feeling is that genetic research and development is more about consumer fads than intrinsic healthcare. Democratic genetics and cheap, affordable healthcare for all is apparently not a significant part of the agenda of those companies developing the technology. Such concerns are looming as a major stakeholder debate. The Economist noted recently that in America - the centre of genetic research and development - debates over genetics are becoming as ubiquitous as debates over abortion, a sign that it is being taken very, very seriously.

The second area, pharmaceuticals, has been the focus of concern as a result of the power drug multinational can wield and the extent to which they can influence public health policy. While drug companies develop an array of valuable products, and are justified in profiting from them, a stakeholder backlash is emerging over the perceived imbalance between profits and public good. An example of the worst applications of this is in drug research. In a study published in the highly respected 'New England Journal of Medicine' it was revealed that the ulterior motives behind corporate funding of medical research was fast removing the culture of objectivity and was creating a dangerous basis for future medical development. Drug companies have become adept at veiling product marketing as news, worthy of public interest by combining the research team's findings with the company's own PR network.

As such, research spokespersons may be presented as objective scientists, but may in fact be representing the company's specific interests. For instance the NEJM article found that much of the media's reporting on research breakthroughs was driven by corporate PR machinery which skewed the findings to promote the sponsoring companies' agendas. For example, 53% of the reports failed to mention side effects and 73% ignored the cost of the new product. In only 40% of the media reports of new drug and biotechnology products were the links between the researchers and their corporate sponsor revealed.

Another issue which emerged here earlier this year, was over the role of drug companies and the government's Pharmaceutical Benefits Advisory Committee. The former committee was somewhat messily replaced and the make-up of the new committee has been seen as too pro-industry to be working in the best interests of national public healthcare.

The third problematic area, is perhaps the one that has the most direct and immediate implications for Australian investors. The vertical integration strategies being pursued by such major operators as Mayne Nickless, Foundation Healthcare, Primary Healthcare and Sonic Healthcare are among the major business trends in this country over the past few years. Vertical integration basically means that companies seek to gather a range of medical services, such as general practice, pathology and radiology under one roof. This allows for greater scale and also for smoother lines of communication - and business - between the different areas.

Some have identified dangers in this trend via the fact that many practitioners, who may be offered lucrative deals to become 'owned' by the vertically integrated companies, have a vested interest in sending patients to certain specialists or in advising the utilisation of certain services, neither of which the patient may need. Commercial imperatives may supplant medical ones.

This is an issue that has concerned the country's peak medical body, the Australian Medical Association (AMA). In the words of one commentator, quoted on the AMA's website, "we cannot escape the recognition that our choices have social and ethical consequences...the introduction of economic imperatives at the heart of the medical endeavour may compromise it in a...fundamental way."

Effectively, the statement above captures the basis of the looming backlash against healthcare and biotech companies. Profits and public health are not easily compatible, at least in the eyes of many stakeholders, and the control that companies in this sector are apparently generating is causing some to question whether theirs is the way to go.

Healthcare and biotech operators are not intrinsically bad. Even major multinationals, despite the bad press, are not all evil geniuses let loose on the world (it's worth noting, for instance, that giant pharma company Merck, prior to the South African settlement, decided to drop its prices on AIDS drugs for lesser developed economies by 40%, thus removing its entire profit margin). But, these companies will need to work harder to prove to consumers and concerned investors that problematic technologies and business strategies are actually good business from the point-of-view of community opinion and social acceptance.

Average expenditure on ethical and moral implications of much genetic research is only around 3%-5% of the total R&D expenditure. That indicates that minds are not focussed on the qualitative issues and, as we have seen before, that's a dangerous situation. For dotcoms, the stakeholder backlash was largely over governance. The whole sector, including champions such as Yahoo!, Oracle and Microsoft suffered. The impact of a global backlash against the booming healthcare sector may yet generate the same force unless the inherent ethical issues are proactively addressed.

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