The Botox Bubble

The current recession is testing a lot of commonly held economic assumptions, such as the belief that health care was a recession-proof industry. People may not buy cars or go on trips when the economy shrinks, but they still get sick, have babies, and require operations. Chronic conditions that need to be treated with therapy and prescription drugs don't go away just because the gross domestic product declines. In economic terms, demand for health care has been relatively inelastic, which is why stock-picking orthodoxy holds that stocks of insurers and drug makers are good to buy in tough times.

But the current recession suggests that health care isn't immune at all. The shape of the health care industry has changed vastly since the last economic trough ended in 2001. Thanks to higher copayments, higher deductibles, and persistent efforts by employers to share costs with workers, strapped individuals have to pick up a higher chunk of health care costs. In addition, according to a recent report by American Health Insurance Plans, in January 2008 more than 6 million people had started Health Savings Accounts and High-Deductible Health Plans, which let people stow pretax money in accounts and spend the cash on health care products and services. (HSAs didn't really exist in 2001.) Finally, big chunks of the health care economy have become discretionary: Nobody really needs Botox, LASIK surgery, or many of the other aesthetic procedures that have helped keep doctors busy.

In this age of consumer-driven health care, will Americans react like retail consumers—switching aggressively to generic drugs and shopping around for cheaper docs? Or will they act like car buyers—reducing their purchases of health care, avoiding doctors, and letting prescriptions go unfilled? Since health care is an enormously complicated field in which costs and spending are influenced by technology, government policy, and a host of other factors, it's difficult to isolate the effect of the recession on it. But there is evidence to support the contention of Les Funtleyder, an analyst at Miller, Tabak, and author of the new book Health Care Investing, that "the economy has become more of a player in health care than in recessions past."

My colleague William Saletan suggested presciently in April that the cosmetic surgery industry would be hit hard by this slowdown. Allergan is a large company that specializes in "discovering, developing and commercializing innovative pharmaceuticals, biologics and medical devices that enable people to live life to its greatest potential—to see more clearly, move more freely, express themselves more fully." You know, things like Botox injections and boob jobs. Well, sales of Botox, whose injections make people's faces look as if they are perpetually surprised, have surprised analysts. Last January, Allergan projected that Botox revenues would rise about 14 percent to about $1.4 billion in 2008. Allergan's third-quarter report wrinkled a few brows when it revealed that Botox sales would rise only 4 percent or 5 percent. Meanwhile, sales of "breast aesthetics" products have been, well, flat. Allergan had been expecting those sales to rise from $298.4 million in 2007 to between $330 million and $350 million in 2008. Now it expects the 2008 total will be between $300 million and $310 million. When Advanced Medical Optics Inc. reported third-quarter earnings, it said that its LASIK eye surgery business, which had fallen in the first two quarters, fell off a cliff in the third quarter, down by about one-third. "We expect U.S. procedures to continue to be impacted throughout 2008 and into 2009," the company reported.

There are signs that nondiscretionary health care procedures and products are suffering as well. Laboratory Corporation of America, the big testing company, earlier this week ratcheted down revenue growth for 2009 by about half in the face of falling growth in testing volumes. HCA, the largest private hospital company, reported that in the third quarter, same-facility inpatient surgeries declined 1.2 percent, while same-facility outpatient surgical cases rose only 0.8 percent.

Pharmaceuticals, which account for a big chunk of health care spending, have been on a tear in recent years. Between 1997 and 2007, notes IMS, the big provider of pharmaceutical data, real (i.e., after inflation) prescription drug spending rose at an average rate of 9.9 percent. But starting last year, the pace began to slow down. As this IMS report notes, factors ranging from patent expirations, the rising market share of generics, and fewer new blockbusters all played a role. This year, however, the economy seems to have emerged as a significant factor in slowing pharmaceutical spending. Last October, IMS said that spending on pharmaceuticals in the United States in 2008 would grow 1 percent to 2 percent, rather than the 2 percent to 3 percent it had projected earlier in the year, thanks in part to economic weakness. More telling than the revenue data are the numbers of prescriptions filled at pharmacies. In 2007, total U.S. dispensed prescription volume grew 2.8 percent, compared with 4.6 percent in 2006. According to IMS, through August, the number of all prescriptions dispensed in the United States was lower than in the first eight months of 2007, which represents the first sustained downturn in prescriptions in at least a decade.

The numbers could be chalked up to a sudden improvement in Americans' health. It could also mean that as they seek relief from recession-induced headaches, more Americans are eschewing prescription meds for Tylenol.