Wednesday, February 9, 2011

The Curious Michael Milken and His Plan for Pharma

Michael Milken writes in an op-ed in today's WSJ
Consider companies that make consumer products—things like soft drinks, detergent, cosmetics and beer. While their price-earnings ratios will vary, in today's market their average will most likely be in the neighborhood of 20. But the average P/E of the largest American pharmaceutical research companies (Abbott Labs, Bristol-Myers Squibb, Johnson & Johnson, Eli Lilly, Merck and Pfizer) was recently near 10. Investors must have concluded that pretzels and eyeliner produce faster profit growth than prescription medicines.

Lower pharma P/E ratios are a recent phenomenon. A generation ago, drug firms regularly topped magazine lists of the most-admired companies in America, a reputation usually reflected in their stock prices. But facing the specter of regulated returns, enterprise values dropped sharply during debates about proposed health-reform legislation in 1993. When the proposals failed in Congress, valuations eventually recovered. In the last decade, pharma P/E ratios dropped again.

Contributing to these lower valuations are patent expirations, regulatory complexity, uncertainty about litigation exposure, and high U.S. taxes on repatriated foreign income. These factors undoubtedly influenced the decision by Procter & Gamble to leave the pharmaceutical business entirely in 2009 and concentrate on consumer products.
Curiously, while Milken identifies this problem as chiefly government interference in the sector, his solution is not less government interference but more. This even though he writes that the health sector, before the government interference, was a significant factor in the increased standard of living in the world:
Since 1820, world per-capita income has risen more than eightfold, thanks in part to the spread of democracy, open trading markets, and the rule of law. But a less-noted source of growth—improvements to health that have given us longer, more productive lives—has produced as much as half of the increase in the global economy over the past two centuries, as research by the late British economist Angus Maddison suggests.
Yet, he wants the central planning:
We clearly need spending restraint in Washington. But smart budgeting will factor in the economic gains that come from longer, healthier life spans and the savings from improved therapies....Congress doubled the budget of the National Institutes of Health (NIH) between 1998 and 2003. It was money well-spent, and we're now seeing exciting announcements from the nation's medical research centers, including 39 new cancer drugs that have been approved since 2004...But the prospects for continuing this discovery bonanza are threatened. NIH funding has trended down in real terms since 2003...

Public and corporate programs aimed at even slight reductions in obesity, tobacco use and other damaging behaviors pay large social and economic dividends...

Give the FDA adequate resources... 
As for the NIH, I have already addressed the weakness in government bureaucratic research. With regard to government programs that "improve" our health, I have an upcoming column that will discuss this problem. And giving the FDA more resources is absolutely absurd. The FDA as a power center has done more to delay the development of new drugs, than any other organization on the planet. It is bureaucratic and occasionally corrupt. I consider it a horrific agency. If one understands the unseen consequences of the delays in drugs as a result of the FDA and the distorted development of drugs as a result of the FDA, then one realizes that it is nothing short of a  death mill.

Milken does call for lowering of taxes on pharma, and lower taxes are always a good thing, but he is clueless when it comes to the nature of government. How can he write an Op-Ed that points to less government interference being the period of greatest advances in halth care, yet call for more government meddling?

I have always contended that the real reason Milken ended up in the slammer for "financial crimes" was because he didn't understand the nature of government and didn't position himself in a way that kept him out of harm's way. I have seen individuals conduct real financial crimes getting less than even a slap on the wrist  by regulators, largely because those individuals knew how to position themselves. It appears that Milken at least understands the importance of this positioning now, when it comes to protecting his wealth and staying out of the big house. If we hear about Milken at all these days, it is about his economic research institute, his efforts to advance education and his work in the health arena. He has learned the importance of spreading a positive public image. Perhaps he even believes in the projects he his funding, but who the hell knows what else Milken is working on to keep these projects funded?

Milken, indeed, has learned what needs to be before the public eye and what doesn't. But the lesson he has learned about government is clearly narrow in scope. His view, that government central planning can supposedly help a country, are average views held by the average couch potato, who hasn't thought on the subjects at all. Milken clearly needs to do more thinking on the nature of government and how it stifles progress rather than advances it. If Milken wants to get in the arena of ideas, he needs to develop a much more sophisticated understanding of how government works.

UPDATE: In the comments, earththatwas links to this important article explaining how the FDA procedures do sometimes result in death.


  1. Move along, fellows. No surprise here.