Our Top Ten in 1999

Our list of the top 10 issues and events from 1999--from the Internet (scaring purchasing groups and reinvigorating the biotech industry); to Pfizer's war on Warner-Lambert; to indigestion among device dealmakers; and to the rebirth of research-based in vitro diagnostics.

1. The Internet, Obviously

In a medical start-up world starved for capital, e-health exploded onto the public markets and industry consciousness. Drkoop.com Inc. , Medscape Inc. , drugstore.com Inc. , PlanetRx Inc.com Inc., Chemdex Corp., and SciQuest.com Inc.all went public at extraordinary valuations. Dozens of other firms are teeing up for IPOs—though the model has already begun to shift (see below).

2. B2C 2 B2B

Even within the year, interest in the Internet shifted from business-to-consumer plays (like drkoop, trading at a 66% discount to its high, or PlanetRx, trading at a 50% discount) to business-to-business. The stars: companies like Chemdex and CareInsite Inc. (both up four-fold since they began trading). Start-ups like Promedix.com (acquired for $340 million in stock by Chemdex [See Deal]), Neoforma.com, and medibuy.com are shaking up the staid hospital supply business. Hospital buying groups, in particular, have felt the pressure and have begun to formulate their own programs in response. Meanwhile, drug firms are warily watching Healtheon/WebMD Corp. , CareInsite, and others: the birth of PBMs with teeth?

3. Indigestion in the Device Industry

After more than half a dozen deals over $1 billion in 1998, 1999 didn't see anything that even promised a major shake-up. The predicted consolidation of the orthopedic industry remains merely predicted. Several deals in cardiovascular devices were interesting, including Abbott Laboratories Inc. 's acquisition of Perclose Inc. [See Deal], but none promised a major near-term competitive realignment.

4. Pfizer's Strategic Turnabout

Pfizer Inc. played the spurned and angry lover at Warner-Lambert Co. 's wedding to American Home Products Corp. and initiated what could likely become the single most important transaction in two decades of pharmaceutical dealmaking. In attempting to take over its own most important partner with the business' first stock-for-stock hostile move, Pfizer raised inter-industry mistrust to unheard of levels and dramatically underlined for investors its huge growth challenges. The deal has created a new bar to big co-promotions while raising fundamental questions about any Big Pharma's ability to grow primarily through research.

5. Biotech Phoenix

Internet stocks weren't the only high flyers in 1999. By the end of the year, investors had fallen in love again with biotech issues, particularly genomics (Millennium Pharmaceuticals Inc. , Human Genome Sciences Inc. , and Celera Genomics Group all saw their shares rocket skywards, jumping 400-1000%). But any biotech stock with a potentially dominating position got a significant boost, like Abgenix Inc. and Medarex Inc. who dominate the antibody-based target discovery field. It was as if pricing measures in biotech switched from traditional discounted-cash-flow models to the Internet's valuation model of "profits be damned so long as you dominate your niche." (The IPO window remained tightly shut for small device companies.)

6. Managed Care's Retreat:

The last several years have seen a significant public backlash against the restrictions of managed care, which is now seeing the light, marked by United HealthCare Corp. 's announcement that it would place fewer prior restrictions on physicians. The decision made clear that managed care companies are realizing that aggressively controlling physician behavior doesn't return the savings that would justify the effort expended. There is some question how truly liberated physicians will be under United's new approach; still, the trend should have a positive ripple effect on product companies. Anything enhancing physician prerogative and reducing restrictions or constraints is good news.

7. …But a Return of Price Controls?

While there's good news from the managed care front, the current interest in Washington in expanding Medicare coverage to include prescription drugs has helped keep drug stocks depressed. The concern: the new Medicare benefit could lead ultimately to greater scrutiny of prescription drug prices and even price controls. Drug companies spent much of 1999 lobbying against expanded coverage. By the end of the year, the industry was, on a more conciliatory note, seeking to work with Federal policy makers to create an affordable benefit. In the end, drug industry worries may prove to have been groundless: history has shown that expanding Medicare is usually only a good thing.

8. The Rebirth of Quest Diagnostics

Quest Diagnostics Inc. 's acquisition of SmithKline Beecham Clinical Laboratories[See Deal]makes it the big gorilla in a shrinking market. Although the industry is still highly fragmented, the deal gives Quest much more clout with suppliers and payers. And, it signals, perhaps, a bottoming out of the reference laboratory industry's woes: Laboratory Corp of America, Unilab, and Dianon Systems Inc. all reported vastly improved profitability in the first nine months of last year as price discounting moderated, at least in part thanks to consolidation.

9. Pharmacogenomics Steps Out

Pharmacogenomics moved closer to mainstream research—as evidenced in two alliances by Millenium Preventive Medicine Inc.At $69.5 million, the deal Millenium cut earlier this year with Becton Dickinson & Co. is unprecedented in size for an R&D alliance in the diagnostics field [See Deal] and then linking up with a diagnostics company to commercialize.

10. Non-Invasive Testers Take Heart—Or Rather Interstitial Fluid

The diabetic point-of-care glucose testing market, perhaps the most profitable and one of the fastest growing segments of diagnostics, currently belongs to four large players. But the FDA is changing the field's competitive dynamics. In June, the agency-approved MiniMed Inc. 's continuous glucose monitor, which, although it is invasive, provides much-needed trending information to doctors. At the year's end, an enthusiastic FDA advisory panel recommended approval of Cygnus Inc. 's long-awaited minimally-invasive GlucoWatchbiographer as an adjunct to (but not a replacement for) standard monitoring devices. Both devices test interstitial fluid, not blood, and do so painlessly. It's not hard to hear the rumblings of revolution.