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Continuing a proud Forbes tradition, here is what I see happening as we move forward through 2012.
1. We'll see more super-expensive drugs. Charging $100,000, $200,000, or even $500,000 per patient per year is the most successful strategy in the drug business. One case study: In 2008, the Joint Economic Committee of the Senate and House heard testimony alleging that drugs for rare, orphan diseases were getting too expensive. One parent testified that the treatment for her son had increased in price from $1,000 per vial to more than $30,000. There was controversy and bad press, but Acthar Gel's maker, Questcor Pharmaceuticals, has become one of the best-performing stocks in any business, up more than 2,500% over the past five years.
Biotech's other best recent performer is Alexion, which makes the drug Soliris for a rare blood cancer. It costs $500,000 per year for the average patient, making it the most expensive drug in the world. This strategy has its limits, and the high prices in some diseases are finally starting to meet resistance, particularly in cancer, where a de facto limit of $100,000 per patient per year seems have been reached. But the mass-market model no longer works. The vast majority of medicines are now cheap generics. No longer able to make money on volume, drug companies are going to focus more and more on price.
2. New genetic technologies will brave the valley of death. DNA sequencing is getting cheaper and making its way into hospitals. Some cancer patients (notably Christopher Hitchens and Steve Jobs) have used genetic tests to try and pick the right drugs for their tumors. But right now using DNA sequencing on patients is not making much money for companies that make DNA sequencers, such as market leader Illumina, and big funders like the National Institutes of Health are tightening their belts. The result is that the two publicly traded genomics upstarts, Pacific Biosciences of California and Complete Genomics, are trading below or near the value of the cash they have on hand.
The beneficiary so far has been Ion Torrent, the new sequencer maker bought by lab giant Life Technologies in 2010. It has been able to build a user base with its sequencing technology, an it could use this bulwark to launch a bigger attack on Illumina. The science will continue to advance. Whether it will happen because of these DNA sequencer companies or next generation efforts like Foundation Medicine, the Google Ventures-backed cancer sequencing startup, is anybody's guess.
3. Medical devices will face an even tougher environment. From heart-focused Medtronic and Boston Scientific to joint replacement makers like Stryker and Biomet, it's been an awful few years. Don't expect it to get better unless the industry can face its fundamental problem: too many of its devices don't face rigorous testing. The unfolding disaster over metal-on-metal hip implants that are deteriorating and needing to be replaced years before they should is just one example of this problem. Fixing it will require these companies to rethink how they invent and test products. It won't be easy, and the industry's response to a report from the Institute of Medicine this summer that suggested more large-scale clinical trials indicate that, as a group, these companies are not facing facts.
4. Health information technology will stall. There's a huge need for better computer systems to improve medicine, and the government is pushing hospitals to adopt them. But I tend to agree with analyst and fund manager Les Funtleyder at Miller, Tabak, who argues that hospitals are going to be slow to adopt new computer systems in 2012. What's really needed is a disruptive innovation, a computer system so good that it solves many of medicine's problems. We're probably not there yet.
5. Pharmacy benefit managers will struggle as their reason for existing vanishes. Companies like Medco and Express Scripts were created to help manage the explosion of mass-market drugs being churned out by Merck and Pfizer in the 1990s. Now they are merging, in part because they are going to get squeezed. Richard Evans of policy analysis firm Sovereign & Sector has called PBMS "the most compelling short story in healthcare" because they will lose ability to make money off of generics as insurers and the government move to new, better benchmarks for drug prices. When almost all drugs are generic, companies no longer need to hire somebody to switch people off the brand.
Bonus Prediction: India will eliminate polio. In a positive step for the effort to eradicate the virus that paralyzed Franklin Delano Roosevelt from the face of the planet, I'm going to predict that India will have managed to banish the disease. It's been many months, as I write this, since there has been a case there. If that keeps up, it will be a major victory for the effort, backed in part by the Bill & Melinda Gates Foundation, to battle this disease. Even if it's true, there's still a great deal of work to be done before this virus is gone.
