Small Cap/Microcap Investor Relations - The PR Solution

Small Cap/Microcap Investor Relations - the PR Solution

By Ned Barnett, APR
PR/Marketing Fellow, American Hospital Association
Adjunct Professor, UNLV & MTSU
Author, Finances for Non-Financial Marketing

It is no big challenge for Fortune 500 companies to manage investor relations. With so much as stake, they can afford high-salaried professional staffs who manage investor communications and massage investor expectations. This is big business, and they do it very well indeed.

However, this is NOT equally true for Small Cap and Microcap public companies. They have to play by the same SEC rules, they have to deal with equally-demanding investors - but they cannot afford to undertake and support major, ongoing high-ticket investor relations programs. Worse, because of their size, many "investor" publications - Fortune, Forbes, BusinessWeek, the Wall Street Journal - choose not to cover them. They're too small to attract the big media's interest.

This is a significant problem for Small Cap and Microcap investor owned firms, but it doesn't have to be. There is a solution - a sophisticated, integrated PR solution, one that won't break the bank but will get the job done - to this kind of investor relations challenge. In more than 25 years of working with investor-owned public companies, we have refined our PR approach so that today, we have found what works. Even more important, it is an approach that is easily adapted for a wide variety of public companies. We've put it to work for healthcare companies, high-tech "Silicon Valley" companies, intellectual property companies and a range of other public companies - and with careful adaptation to individual companies' needs, we know that it works, and keeps on working.

Strategic elements of this campaign include the following components. However, before you begin considering them, please note - the "Do Not Do This At Home" warning applies. If you do not intimately understand the nuances of a PR approach to Investor Relations, attempting to use this template as YOUR plan can lead to disaster. However, if you do understand how to make PR work in an investor community - if you really understand the SEC and it's Fair-Disclosure regs - if you know how to work with the media (and get them working for you), then this template will save you a great deal of effort.


Drumbeat: You need to put out valid, legitimate, newsworthy press releases on a regular and aggressive schedule - ideally every week, but certainly no less than every two weeks. You can't pad the list of releases with BS no-news news releases - that invites a kind of disaster you can better live without. And you can't expect - or create the expectation - that a significant number of these releases will be picked up by the traditional media. But with the proper emphasis, along with the proper wire service distribution strategy, a regular drumbeat of press releases will work for you.

Off-Broadway: You remember the old joke: "Where does a Broadway Show open?" "Off Broadway." That's the essence of this strategy. Instead of shooting (at least initially) at out-of-reach "Marquee Media" - the big names that seldom cover Small Cap and Microcap companies - go for smaller niche-market media who are hungry for news that nobody else has covered ... yet. Identifying these - and courting them - is a fine art, but the results can be all out of proportion to the effort.


Breadcrumbs: Like Hansel and Gretel, you want to leave breadcrumbs on your trip through the dark and forbidding forest of Investor Relations. However, these breadcrumbs are not intended to lead you home - they are intended to lead media members and potential investors to you. You do this through a strategic, systematic selection of topics for your drumbeat of press releases - with those, you are creating a "story" that, when a reporter or an investor "puts it together for himself" by finding it via Google or some other search system, makes your case for them. Because they've found this information themselves, they are more inclined to believe it. When it comes to Small Cap and Microcap Investor Relations, remember: "Credibility is King" ... and nothing creates credibility like favorable press coverage (or what appears to be favorable press coverage).

Open Kimono: Investors and reporters both look for - and appreciate - apparent candor from C-level Execs at Small Cap and Microcap companies. Yet most corporate C-level execs are rightly concerned about being too open - when done right, business is aggressively competitive, and only a fool will think that competitors aren't listening. There is a way - an effective way - of creating the appearance of open-kimono candor without giving away the ranch. The Internet can be a great help - or it can be your corporate downfall. Knowing how to handle blogs, and webcasts, and bulletin boards is critical to success - but once you master those skills, and once you commit the time to managing those tools, "open kimono" can be a decisively-effective strategy.

One Size Fits All ... NOT! There is a temptation among smaller companies - those concerned with operational costs as well as with success - to look for a low-cost one-size-fits-all solution to their IR problems and opportunities. But Lowest Common Denominator can only meet the lowest-level of needs, and with low-levels of results. However, with refinements specific to an individual company's needs, resources and opportunities, a template such as this can be made to work - often with dramatically-positive results - to transform a Small Cap or Microcap's investor relations program.

Social Networking All of the above should be carefully integrated into, and supported by a sophisticated "2.0." version of social networking - making use of YouTube videos, Blogs, White Papers and Case Studies which put out the information about the Small Cap/Microcap's news in differing formats for different audiences, all further supported by a controlled series of Facebook posts, Twitter tweets and LinkedIn messages. In addition, social networking efforts can help to turn investors and potential investors into an "affinity group" that will support your efforts at investor relations.

The bottom line is this: Help and support the stock price to move to where an aware market rationally decides it ought to be. IR cannot improperly move stock prices - rightly so - but a solid program can help a stock assume its appropriate market position ... and it can do so in a cost-effective way that makes your IR program a valuable investment, rather than a burdensome overhead cost.

Technology Tremors

By Ned Barnett, APR
PR/Marketing Fellow, American Hospital Association
Adjunct Professor, MTSU & UNLV
Author, Finances for Non-Financial Marketers

There was a time when the horse-drawn carriage was the ultimate form of in-city and cross-country personal travel technology. That time, dating back to the invention of the chariot in roughly 3,000 BC, lasted for almost exactly 5,000 years, and during those five millennia, the “buggy whip” was as essential as axle grease to the proper function of carriages, chariots and horse-drawn conveyances of all kinds. Which meant that the buggy whip industry was steeped in a heritage – reflecting in market security – that was apparently as “eternal” as the wheel itself. However, in a period of little more than 20 years, the buggy whip went from being essential to being an anachronism, a reminder of bygone days.

Whenever technology changes, businesses built around “traditional” technology changes disappear, sometimes overnight. With the ever-increasing pace of technology change, products or companies are disappearing or transforming at a staggering rate. This has profound implications for investors, when once-powerful blue-chip stocks seem to hit the skids with little or no warning. The key word there is “seem” – those businesses all had ample warning, and some of the most traditional companies have been able to make dynamic transitions, while other once-flexible powerhouses collapse in Chapter 11, some never to rise again.

One of the first big victims of the transformation of technology – after the buggy whip, of course – was the railroad industry. For nearly 100 years, railroads dominated not only cross-country transportation but the stock market as well. Railroad corporations were seen as safe and unchangeable as public utilities, and though the industry was widely regulated, railroads still had profit potential which exceeded those utilities.

The peak of railroads’ industrial and economic power was also the watershed for its sudden collapse. In World War II, America went to war on rails, steel highways that connected the ports of the East and West Coasts, moving millions of soldiers and hundreds of millions of tons of the output of the Arsenal of Democracy. Yet the seeds of change in the transportation industry were found in World War II, and railroads were not ready to change.

Beginning in the mid-1930s, with the advent of the venerable DC-3 – the first commercial airliner capable of making a profit based on carrying passengers (prior to the DC-3, airlines survived financially by carrying subsidized airmail) began the transformation of passenger travel. An express passenger train that could average 50 mph cross-country would take 60 hours to cross America, while a DC-3, averaging three times that speed, could carry 20 passengers in reasonable comfort across the country in less than a day, coast-to-coast.

During World War II, planes were built that vastly exceeded the DC-3 in terms of both speed and carrying capacity, and during that same war, airfields were built in every city worth the name which could handle those new airliners. Within a decade after the war, passenger trains transformed from the primary means of travel to a footnote.

At the same time, as America conquered Nazi Germany, we discovered an innovation – the autobahn (the first super-highways) that allowed passenger cars, buses and semi-trailer trucks to travel between cities as fast as express trains, but with far more flexibility than was allowed by rail travel. Shortly after the war, General Eisenhower became President Eisenhower, and in the name of national security, he began the construction of the Interstate Highway system, intended to replace railroad travel in moving troops, tanks and military supplies swiftly and safely in time of war.

Had railroads seen themselves in the “transportation” business instead of the “railroad” business, they would have invested their impressive profits in airlines, trucking lines and inter-city bus lines. If they’d done so, they would have remained viable, profitable businesses, with their investors enjoying the benefits of a continuing stable industry. But they were so used to being “railroads” instead of “transportation companies” that by the time they collectively realized that they were being replaced by airlines and trucking companies, it was too late to change.

The technology tremor that changed the railroad industry forever took a quarter century, start-to-finish. However, more recently, dramatic industry changes spurred by technology tremors – changes that involved the eclipse of “traditional” manufacturing companies wedded to “traditional” technology by technological upstarts – have come about much more quickly. Here are a few examples:

· Radio (replaced by TV). The technological tremor that changed radio forever took place at the same time as the railroad industry change. National radio networks had, for more than a quarter-century, connected America as a nation, providing the kinds of communal experiences – think of Orson Welles’ broadcast of War of the Worlds, or the news coverage of the Hindenburg crash – that held us together.

However, in the immediate post-war world, TV was a bold new experiment, but all the experts expected that it would take fifteen years or more to even begin to impact radio. Instead, it took less than five years. Along with radio, TV all but killed the regular attendance at movie theaters (and especially movie newsreels), and had a major impact on big weekly national magazines such as Life, Look and Colliers.

Prior to the advent of commercial TV networks, the three common shared experiences that linked Americans from Portland, Maine to Portland, Oregon were network radio, theatrical movies and weekly general interest magazines. Within the single decade of the 50s, TV all but replaced all of these cultural mainstays, and with that replacement, TV changed the radio industry, Hollywood and the entire periodical magazine field. Millions of investors who’d bet on those staples found out that they’d bet wrong. Broadcast television was here to stay (although that three-network industry was changed as dramatically by the relatively abrupt appearance of cable as TV itself changed radio, print and Hollywood).

Investors who saw this change coming – and they were relatively few, for this change was both dramatic and historically unprecedented – won, big-time. However, millions of investors lost billions of dollars by holding onto radio, publishing and film-production stocks beyond their prime.

· Fax machines. Though initially developed in Japan in the 1920s, this “cutting-edge technology” first began to emerge as a useful and widespread business technology in the mid-80s, and peaked in the mid-90s, when affordable fax machines could be found even in small and home-based businesses; but, within another decade, they had almost completely been replaced by scanners and email. There were a handful of market-dominant fax machine manufacturers which burst upon the scene, soared for a decade, then either evolved or died. Investors who weren’t ready to jump onboard – and jump off before the crash – missed an opportunity or were crushed by the change.

· VHS recorders and players. Once VHS commercially won its technology war with Betamax format in the mid-80s, it had a decade-long run as the dominant home playback video technology, but that was quickly replaced with DVD technology. DVD is being challenged by Blu-Ray, but because of the consistent price difference, standard DVD has held on as a viable format. Some of the manufacturers of VHS made an agile shift to DVD, but a whole range of new manufacturers arose to replace VHS producers (both of the hardware and the “software”), making slow-moving investors wondering what hit them.

· Typewriters. You remember those devices, don’t you? For more than 125 years they were the one essential office machine – they used to be found at every secretary’s desk in businesses large and small across America. The ultimate version of the typewriter was the IBM Selectric II, which remained a strong seller into the early 80s – yet by the mid-80s, because of a profound technology tremor, they were being replaced by IBM PC “word processors,” and within a half-decade they had begun to disappear entirely.

Related to the disappearance of the typewriter was the “need” for a computer on every executive’s desk and the replacement of the business letter with the email, and with that, the disappearance of the Secretary as a viable career path. While a relatively few executives still require “executive assistants” to handle things other than typing letters and reports, the “every executive must have a secretary” idea began to quietly disappear sometime in the late 90s.

While IBM made a seemingly easy transition, other major typewriter makers – Royal and Smith-Corona come to mind – didn’t make the transition to word-processing computers and either found new markets or went the way of buggy whips, and their investors either made the transition or suffered the consequences.

· Vinyl records. The standard audio playback technology for more than a half-century began to be replaced in the late ‘60s by 8-track tape players (reel-to-reel may have begun the replacement, but it never caught on as a format for the commercial sale of recordings), which were soon replaced by cassette tapes (remember the Sony Walkman?), but those were also fairly quickly replaced by CD digital recordings.

As a technological platform, CDs have lasted far longer than many expected, but as a commercial means of delivering music and other recordings, they were replaced by iPods and digital downloads. Few turntable manufacturers made the transition, and each time the music technology changed, there were new investor winners and losers.

· Movie film. The 35mm celluloid film that has been the staple of projected films in movie theaters for more than a century has suddenly all but disappeared. Chicago Sun-Times film critic Roger Ebert recently (Nov. 2, 2011) wrote about the sudden death of 35 mm film in Cineplexes, replaced in commercial movie theaters by digital projectors:

I didn't see the death of film coming so quickly or so sweepingly, and I imagine the manufacturers of film stock didn't either … Who would have dreamed film would die so quickly? The victory of video was quick and merciless … New 35mm movie projectors are no longer manufactured, for the simple reason that used projectors, some not very old, are flooding the market …A great many multiplexes are no longer capable of projecting the 35mm format that has served faithfully since about 1895.

As Ebert noted, makers of film stock, along with the makers of film projectors didn’t anticipate this change. They have been replaced by digital projector manufacturers, especially those who produce 3D projectors. On the stock market, a change of this nature has its winners, and its losers.

Some technology tremors occur with dramatic upgrades in the same technology, making the older version obsolete. While a ’57 Chevy or a ’65 Mustang is still technologically viable, operating systems such as Windows 95 (or Win 98, or Vista or …) have become obsolete, not because they no longer worked but because you can’t get tech support for what would otherwise remain viable. And of course, Windows in all of its many formats replaced DOS, which beat out CP/M (which many, including me, felt was a superior OS), just as the various MAC versions superseded what were otherwise still-workable Apple operating systems.

Another current example of this trend toward unsupported obsolescence is taking place right now in the USB market. As Scott A. May reported in an article last summer in the Columbia Tribune:

“A good example of leapfrog technology is USB, today’s industry standard for connecting myriad devices to computers, stereos and TV. Early adopters, in the late 1990s, paid a premium price for connection speeds that topped out at 1.5 megabytes per second. Within a few years, USB 2.0 was out, increasing the speed to 60 megabytes per second. That angered a lot of people who jumped too soon on the older, slower technology. USB 2.0 ruled the roost for almost a decade, currently replaced by USB 3.0, with speeds of 640 megabytes per second.

“There still are plenty of new computers and peripherals being sold that utilize USB 2.0.” May continued. “They function just fine but are technically obsolete and therefore not a wise investment. On the other hand, just because USB 3.0 is 10 times faster than USB 2.0, that doesn’t mean you must upgrade all your equipment, unless you have the need or desire to always ride the cutting edge.”

However, while the older USB is “obsolete,” the manufacturers of this technology just upgraded what they were building. It is the end-user who may feel left behind,

Of course, not all sudden industrial obsolescence is a matter of new technology. Some of it involves market-shaking price changes, rather than innovations in replacement technology. For instance, in the middle of the last decade – in the 2007, The History Channel informed its cadre of independent program producers (who, in turn, generally used independent camera crews, who provided their own equipment), that in the future, all production video would have to be shot and produced in Hi-Def.

At that time, a simple Hi-Def sound-on-video camera cost in the range of $50,000. Today, seven years later, better equipment can be had, new, for about $1,600. Manufacturers of conventional sound-on-video cameras who didn’t transition to Hi-Def were put out of business, and those which tooled up to produce $50,000-plus cameras quickly found that their market had disappeared; they either adapted to profitably producing equipment for professionals at a cost home hobby cameramen could afford (though they were using their phones and iPads, the amateur flip video cameras having died off as well), or went out of business.

All of this brings us to our most recent technology tremor, one that has shaken a blue chip to its very core.

Eastman Kodak is 131 years old, and in late January it filed for Chapter 11 after an amazing run as one of the most powerful technology-based companies in the market. Although they could have (read “should have”) seen the coming demise of film-based photography as long ago as 1980, they nonetheless seem to be caught off guard. To many, this seems incredible, especially for a company built around technology and technological innovation. For instance, in the ongoing bankruptcy, Kodak – which received $3 billion in licensing revenue from 2003 to 2010 (but only $98 million last year) is trying to sell off 1,100 digital patents in order to generate enough money to stay afloat.

Some would contend that they even saw the change from film to digital photography coming – they had become a powerhouse in the manufacture of digital cameras, including digital versions of traditional SLR (single-lens-reflex) cameras, the ones with interchangeable wide angle and telephoto lenses. What they did not anticipate was the replacement of those finely-engineered devices by the high-resolution still and video cameras built into smart phones and iPads. Kodak wasn’t alone in this – Cisco recently shut down the manufacture of the (until very recently) popular flip portable video cameras.

Clearly, when betting on technology, it’s becoming more of a short-term bet than ever before. Almost by definition, technology tremors cannot easily be predicted in advance. Not all “sure thing” technologies actually work out in the marketplace. Consider Betamax, arguably a superior technology to VHS. Backed by market powerhouse Sony, many thousands of users and investors bet on Betamax, but the public embraced VHS and made Betamax a footnote.

When it comes to betting on either an established technology or a new technology tremor-driven start-up innovator, the rules that apply in Las Vegas casinos apply in Wall Street, too. The dice have no memory, and the house always wins.

The Changing Landscape of Retail and Institutional Pharmaceutical Sales

By: Ned Barnett, APR,

Marketing/PR Fellow, American Hospital Association

Adjunct Professor of Marketing, MTSU & UNLV

Author: Finances for Non-Financial Marketers

Author: Hospital Marketing: Step-by-Step

Author: Insider’s Guide to Hospital Finances

Author: The Big Five: An Insider’s Guide to Investor-Owned Hospital Companies

Introduction

“Look for companies with “economies of scale, consistent earnings, solid returns, low debt levels, and a business concept that he can understand …” – Warren Buffett

There have been a number of recent, dramatic trends in the sales of pharmaceuticals – retail-to-the-public, and wholesale-to-institutions – as well as trends in the sourcing and compounding of pharmaceuticals. These trends have been coming together over the past decade, significantly changing one of the world’s largest and most profitable industries. In the process, these trends have served to open up new market niches for companies which, if they have succeeded in anticipating the market, have come to represent remarkable, often little-noticed investment opportunities.

The US population is driving the market. Currently, 12% of the population – 37.1 million Americans – are over age 65 – and this number is expected to double, to 71.5 million, by 2030. This population takes an average of 2 to 7 prescription medications each day. However, the population who are the most intensive users of pharmaceutical products – Americans over 85 – is expected to skyrocket from 6 million today to 21 million by 2050.

By 2030, 40 percent of all pharmaceutical spending by consumers will be in the “Specialty Pharma” market. This is one of a number of key factors which are driving the M&A market for Specialty Pharma companies, more than doubling in 2011 from 2010, with Specialty Pharma companies doing more than $50 million annually shaping up to be particularly attractive acquisition candidates.

Retail

The Retail pharmaceutical market has changed almost beyond recognition in the first decade of the 21^st Century – but that change is just the harbinger of dramatic transformations in pharmaceuticals, packaging and delivery techniques to come over the next decade …

In the beginning, there were neighborhood apothecaries – the archetypal “drug store” where hard-working pharmacists used mortar and pestle to compound individual doses of prescription and non-prescription pharmaceuticals – at least when they weren’t compounding ice cream sodas and selling a variety of general merchandise to customers who – for the most part – lived within walking distance of their establishment. Hollywood enshrined this local businessman in “Mr. Gower” in “It’s a Wonderful Life,” but for two centuries, this was the model followed throughout America.

Over time, the neighborhood drug store evolved from an individual “mom-and-pop” store into a member of one of a very few national chains. These mega-retailers: CVS (which reports that it is the largest retail pharmacy in the US), along with SavOn, Walgreens, Rite-Aid and other chain retailers – function with a team of pharmacists and assistants who dispense prescribed doses of bulk-produced prescription pharmaceuticals. These medicines were prescribed by physicians who were, in turn, courted by a panoply of “doctor detail” pharmaceutical sales reps, each representing a variety of drugs manufactured by “Big Pharma.” This trend proved so profitable that Big Box stores – Wal-Mart, K-Mart, even chain supermarkets – have all leapt into the retail prescription market.

However, over the past decade, the face of retail pharmaceutical sales has changed forever. Today, consumers have choices, and millions of consumers know that they can lower the price they pay for their medications by being careful shoppers. They can seek out lower-cost retail distributors, such as legitimate Internet pharmacies or mail-order services associated with their local retail pharmacies. Even greater savings are possible if lower-priced generics or over-the-counter formulations can be substituted for branded prescription drugs.

In today’s drastically-altered marketplace, retail prices for prescription drugs vary widely, and the savings possible from careful shopping can be substantial.

This price variance depends on where the consumer makes the purchase. According to the American Enterprise Institute, consumers can save 10 to 40 percent by shopping for the best price for brand-name prescriptions. Storefront pharmacies that have a low volume of sales are likely to have the highest prices, while large mail-order operations tend to have the lowest prices. The convenience of the local retail pharmacy typically comes at a price because of higher overhead costs and a lower ability to negotiate discounts with manufacturers.

This dynamic sea-change began with firms which specialized on providing – by mail – a relatively few and relatively tightly-focused medicines, such as those catering to Medicare-covered diabetics. This is evolving in a number of directions, from firms specializing in low-cost erectile dysfunction prescriptions to those based in Canada which offer significantly discounted prices on a wide variety of prescription drugs – many manufactured in Europe, Asia and South Africa.

In addition, the AARP is, along with serving as a non-profit advocacy group for seniors, a major drug retailer – millions of its more than 36 million of its over-age-50 members use AARP Pharmacy Service to fill both retail and mail-order prescriptions. AARP is notably shy about reporting the exact number of members who use this service, as well as the price tag – known to be well over a billion dollars – that it rakes in by providing these services.

In addition, there is a growing U.S. specialty pharmaceuticals market, primarily comprised of more than 90 companies marketing more than 550 prescription pharmaceutical products in more than 10 therapeutic categories, such as CNS disorders, pain management, men and women’s health, rare diseases, and urology.

Specialty pharmaceuticals are mainly prescribed by clinical specialists and target well-defined patient groups. In many cases, “specialty” products address large unmet needs that in many cases are inadequately being treated. Examples of “hot” specialty indications include but are not limited to infertility, gout, cystic fibrosis, pancreatic insufficiency, vitamin deficiencies, bipolar disorder, multiple sclerosis, and fibromyalgia. A more complete listing includes:

- Central Nervous System
- Pain Management
- Dermatology
- Ophthalmics
- Gastrointestinal
- Respiratory / Allergy
- Women’s Health
- Men’s Health
- Cardiovascular
- Urology
- Diabetes
- Hospital & Acute Care
- Rare Diseases

The US specialty pharmaceuticals market had an approximate value of $21 billion in 2009, determined by the US sales of specialty pharmaceutical products.

Drug delivery specialty pharmaceutical products are key contributors to the US Specialty Pharma market, generating revenues of $10.6 billion in 2009.

IV Home Infusion: A major trend in retail pharmaceuticals involves packaging and delivery, rather than new products. An example which has been marked for growth is the home infusion market.

Packaging and Dispensing: Equally significant have been the growth of packaged drug dispensers. A major issue among pharmaceuticals today is the non-compliant mis-taking of drugs by individuals who have a dozen or more prescriptions, some of which (when combined) can have an impact on perception and awareness. Even without the debilitating impact of aging, individuals with one or several chronic diseases – each of which require multiple prescriptions dosed at a variety of times during the day or night – require help in sorting and dispensing their home prescription medications.

Companies which provide either the technology required for ordered home dispensing, or which come up with distinctive packaging solutions which address this same concern, are likely to become winners in the marketplace through the end of this decade and beyond.

Non-Compliance: Medications are only effective when taken – often, only when taken on schedule and in combination with other prescribed pharmaceuticals. To say that this can be confusing is a monumental understatement. As many as half of all Americans fail to stick to prescribed regimens of prescription drugs, and 30 percent of prescriptions written by doctors are not even filled, refilled or taken as directed. Patients with chronic diseases which require regular and multiple prescriptions are notorious for non-compliance and non-adherence – whether they forget to take their meds or choose to avoid taking them for financial or convenience reasons, the consequences of non-adherence can be dire.

The effects of medication non-adherence are far-reaching, with potentially deadly consequences for some patients and financial implications for the medical and pharmaceutical industries. Non-adherence has been likened to a chronic illness and referred to as an epidemic, with no regard for gender, race, economics or education.

According to the Wall Street Journal, studies of heart-attack patients show those who don't fill needed prescriptions have a significantly higher one-year death rate, while those who adhere to their prescriptions have better outcomes and require less care.

The New England Healthcare Institute reported that patients who don't take their medications as prescribed cost the U.S. health care system an estimated $290 billion in avoidable medical expenses annually. Because 32 million Americans are prescribed three or more medications –which can lead to drug interactions and confusion over schedule and dosages – this non-compliance is easy to understand.

Out-of-pocket costs are a major reason for non-compliance, but studies show that even fully insured patients all too frequently drop or fail to start a prescribed drug. Patients worry about side effects – and those who hear TV commercials for prescription drugs that spend 45 seconds out of a 60-second message warning of risks of side-effects have good reason to do so. Yet by refusing to take prescribed drugs, they risk damaging their health while significantly increasing their cost of healthcare through lost work days, increased frequency and length of hospitalizations and other factors.

Sourcing and Compounding

Where once prescriptions medicines were individually compounded “while you wait,” today they are produced in vast lots, often outside the U.S., and distributed via channels that didn’t exist even a decade ago …

Some of the most significant changes in pharmaceutical marketing came to us courtesy of intervention by government – pushed, behind the scenes, by insurance companies and Medicare/Medicaid bureaucrats – that led to the legislative mandate that generic drugs be made widely available, where they could be specified by third-party payors. That they were not always as effective as the “brand name” was immaterial – as was the way that generic laws distorted pharmaceutical companies long-term per-medicine profits, forcing the price of pre-generic proprietary drugs sky-high as Big Pharma had to rush to regain their investment over the course of years, rather than of decades, resulting in the fact that prescription drugs often have a 1,000% mark-up.

This, in turn, leads to the facts behind a 60 Minutes interview of former Surgeon General Richard H. Carmona, who said “Americans pay more for brand-name prescriptions than anyone else in the world, because of the hefty price associated with the research and development of drugs.” What he didn’t add was that prices are high because pharmaceutical companies have a limited time to cover R&D costs before they are forced to release drugs for the generic market.

Then, as generics become market-accepted and market-demanded, extra-national sources of prescription pharmaceuticals became a market-reality. These medicines often came from Canada – “the price differential for brand-name drugs between the U.S. and Canada has led Americans to purchase more than US$1 billion in drugs per year from Canadian pharmacies.”

However, while they may be sold by Canadian pharmacies, they are often actually compounded in European and Asian countries, from France, South Africa and Israel (home of Teva, the world’s largest generic drug manufacturer) to India, China and Singapore, countries which do not always maintain the high manufacturing standards imposed by the FDA, or by the Canadian and European Union’s equivalent agencies. For instance, in an article about China’s FDA head’s conviction for systemic bribe-taking, the New York Times has reported that “every year, thousands of people in China are sickened or killed because of rampant counterfeiting of food and drugs.” As foreign-compounded drugs become more available – and more prevalent – in the U.S., this kind of problem may bleed over into the American healthcare system.

Yet despite their potential drawbacks, the dramatic reduction in wholesale and retail prices will continue to outweigh safety and efficacy issues – the smart money will continue to bet on foreign-sourced and generic drugs capturing an increasing share of market into the future.

Wholesale and Institutional

Outsourcing of prescription pharmaceuticals by institutional care-givers has evolved from rare to common, and from local to decentralized national providers. As the source has moved away from the facilities, “service” has suffered in the name of lower costs and higher margins.

There has been a strong division in the institutional market, with hospitals on one side of that equation, and skilled nursing facilities and other extended care facilities on the other side.

Hospitals, because of the short lead-time and aggressive patient turn-over, tend to maintain their pharmacies in-house, rather than outsource their prescription pharmaceutical needs. However, hospitals – while they have total control of pharmaceuticals dispensed to their patients – have not been able to make significant inroads into the post-discharge market. This represents, at this writing, a huge potential market waiting to be tapped by a hospital partner which can come up with a solution which will allow hospitals to tap into this hugely-profitable revenue source. That solution has yet to be identified, but – in part because hospitals, facing imposed and negotiated cuts in reimbursement, are increasingly desperate for any additional revenue source – the first vendor who can deliver this market will further change the face of prescription pharmaceuticals. That investment will be as close to a “sure bet” as anything this side of a winning lottery ticket.

On the other hand, Skilled Nursing Facilities (SNFs) and other extended care facilities (ECFs) have – because of the nature of their lower-turnover patient clientele – have long outsourced their pharmaceutical services. Initially, pharmaceuticals were outsourced to local closed-door wholesale compounding and dispensing pharmacies, which specialized in high levels of customer service. However, within the past half-decade, a few large national firms have bought market share, shaving margins but sacrificing client service.

As the large national firms have further consolidated the market – two of the largest firms have only recently merged – industry insiders report that service has continued to deteriorate while prices are rising. This has opened the market to newcomers who can compete either on the basis of enhanced and responsive local service or on reduced prices – or perhaps on a different service model which will more effectively meet the operational needs of the SNFs and other ECFs.

The Investment Model

As once-reliable investment opportunities fall on hard times or prove to be less than blue chip, investment “risk” should be evaluated based on perceived market opportunity …

As a business – and as an investment – despite the overall economy, healthcare remains strong; according to the New York research firm CB Insights, healthcare companies received $1.9 billion in investment during the second quarter of 2011, up 21 percent from the prior quarter and up 16 percent from the same quarter last year. There were 147 venture-backed healthcare deals in the quarter. Seed investments accounted for 5 percent of the total, up from 1 percent in the first quarter.

Specialty Pharmacy companies are being funded at a strong pace; and are using that funding to acquire local-market specialty pharmacies throughout the United States. A recent example is Echo Specialty Pharmacy Services, a New York City firm specializing in providing drug therapies for transplant, oncology and HIV/AIDs patients – all high-volume “pharmaceutical cocktail” users who require a significant number of high-ticket medicines on very tight schedules. In addition, many of these Specialty Pharma companies have been accumulating cash on their balance sheets, making them attractive M&A targets. As a result, trading and transaction multiples are up over recent historical levels, especially for small cap companies.

However, while Specialty Pharma is soaring in terms of business generated and M&A activities, Big Pharma has been facing major challenges to sustained growth for well-documented reasons, including:

1. Mega-sized revenue bases

2. Major product patent expiries

3. A more aggressive and better capitalized generic drug industry

4. Thin mid- and late-stage pipelines resulting from low R&D productivity

In the near term, smart money is looking not so much for companies with new formulations – that remains a multi-million-dollar crap shoot – but in those which can address specific problems facing today’s marketplace. For instance, any company which can effectively address non-compliance, either at the retail or the institutional level – which can help individuals stay healthier by taking even the most confusing “cocktails” of prescription drugs – has a remarkable opportunity to become the next run-away bestseller in the pharmaceutical hit parade.

Pharmaceutical Industry – Run the Numbers

With the Baby Boomers entering the plus-65 market at a rate of 10,000 per day – a rate that will continue for decades to come – pharmaceutical retailing and wholesaling operations are, pure and simple, reliable cash-generating operations – money machines with few working parts to break down …

If ever there was an industry that was destined, by virtue of demographics, to grow now and in the foreseeable future – on out to 2050 or later – it is the pharmaceutical industry. Not just Big Pharma with their multi-billion-dollar breakthrough prescription medicines, but also those firms which can more effectively serve the retail or institutional markets, providing solutions to rampant (and deadly) non-compliance or skyrocketing retail costs.

In Q4 of 2011, Credit Suisse reported that this market segment continued to outperformance the S&P year-to-date, and projects that, through 2020, sector growth of 5-7% or more per year is expected for at least the next eight years; despite flat international economies, this savvy organization has just pushed its market projections upward. It also reports that this market segment’s resiliency to threats is potentially far better than appreciated by the markets at this time.

The Specialty Pharmaceutical Market is particularly attractive to investors. For instance, according to a confidential report by Bourne Partners, there are three main categories of Specialty Pharma companies:

· Branded original manufacturers

· Branded generics companies

· Drug delivery and reformulation companies

Specialty Pharma companies, Bourne reported, market products within a defined therapeutic area with a small, focused sales force. In order to avoid direct competition with big Pharma, Specialty Pharma companies typically target areas of limited competitive activity. For example, reformulation, repackaging and subsequent brand development are key strategies utilized by Specialty Pharma.

The National Market

Pharmaceutical demand continues to trend upward while cost pressures squeeze providers to find more cost-effective sources of supply …

One wildcard in the healthcare market generally is healthcare reform; however, for the Pharma market, this offers nothing but upward trends.

The volume benefits of healthcare reform based on expanded coverage to 32 million new lives are clear – this could add $11 billion dollars annually to the prescription drug market. Innovations in delivery of this huge influx of demand create bold new markets for those willing to embrace alternatives to the traditional corner drug store.

However, the numbers show that there are unmet demands, and waste in the system which could be addressed by innovative packaging or other practical solutions. According to the national Council on Patient Information and Education, as reported in the Wall Street Journal:

· Even before healthcare reform dramatically increases the market, 32 million Americans take three or more medications daily

· Nearly 75% of Americans report not always taking their medications as prescribed

· Almost 30% of Americans stop taking their medicine before it runs out

· Only about half of patients with high blood pressure take their prescribed doses of drugs

· Non-Adherence is linked to 125,000 deaths per year, and poor adherence costs between $177 billion and $290 billion annually, depending on the source and methodology of the study

Conclusion

While the investment market remains volatile to a remarkable degree, there remain solid, reliable and attractive investments available to those who actively seek opportunity …

It is hard to imagine someone over the age of 40 who doesn’t regularly take some kind of prescribed medication. Our society, our culture, our collective lifestyle – all of these factors mitigate toward the kinds of chronic health problems best solved or ameliorated by prescription medications. Big Pharma – and more specialized Specialty Pharma – companies continue to come up with medical solutions for what were, at one point, not even problems. Yet with effective and aggressive marketing and promotion, prescriptions which are “solutions in search of a problem” are nonetheless becoming profitable – often hugely profitable.

At the same time, as individuals age – and our society is aging as never before, and will continue to do so at least through 2050 – they become more dependent on pharmaceuticals, and more challenged by the difficulties of remembering and complying with those prescribed drug regimens. Here indeed is a problem in search of a solution – both at the institutional level and at the consumer retail level. Whether it involves dispensing devices or pre-packaged ready-doses, there is a market eager to enrich companies which come up with real, effective solutions.

With damage measured in hundreds of thousands of lives lost and hundreds of billions of dollars in lost costs, the solutions will be rewarded. Savvy investors continue to sift the opportunities, looking for that golden nugget in the pan of gravel.

Reference Sources

1. AARP Wants You (to Buy Its Line of Products), Claudia Deutsch – The New York Times

2. House Ways and Means Committee, March 2011: Behind the Veil – the AARP America Doesn’t Know (includes information on AARP’s Medicare Part D drug coverage insurance, a billion-dollar a year venture for that “non-profit”)

3. American Enterprise Institute Health Policy Outlook Report – Inflated Claims about Drug Prices, Joseph Antos, Thomas F. Widsmith

4. 25 Shocking Facts about the Pharmaceutical Industry – Nursing Online Education Database – noebd.org

5. US Pharmaceuticals – View to 2020: Credit Suisse; Catherine J. Arnold and Ari Jahja

6. 60 Minutes Interview with former Surgeon General Richard H. Carmona, transcribed at the Media Matters website

7. “The Truth About the Drug Companies,” Marcia Angell (book)

8. Many Pills, Many Not Taken – Tracking Prescriptions with Technology, Personal Touch; Laura Landro, Wall Street Journal, October 10, 2011

9. Bourne Partners Confidential Healthcare Merchant Banking & Financial Advisory – Specialty Pharmaceutical Industry Update, May, 2011

10. “Why We Pay So Much,” Time Magazine

11. “Internet Pharmacy: Prices on the Up-and-Up,” Stephen Morgan & Jeremiah Hurley, Canadian Medical Association Journal

12. “Millions of Americans Look Outside U.S. for Drugs,” Washington Post

13. “Trends in Manufacturer Prices of Prescription Drugs Used by Older Americans,” David Gross, Leigh Gross Purvis & Stephen W. Schondelmeyer, AARP

14. “Pfizer Goes to Court to Protect Exclusive Rights to Sell Viagra,” David Sell, Philadelphia Inquirer, June 2011

15. Specialty Pharmacy News – Volume 8 (various issues)

16. MedCity News – Healthcare Venture Capital Investments Hit Five Quarter High

17. Boehringer Ingelheim Pharmacy Satisfaction Study – 2009 Medication Adherence Report