Editor's Note: This year was a particularly absurd one for the health care industry. In light of that, we've expanded on our popular "Five Dumbest Things on Wall Street" to offer our "10 Dumbest Things in Health Care This Year." Part one examines the blunders of five big-cap names. Stay tuned for part two, which looks at the missteps of smaller companies.
1. Caremark's Comedy of ErrorsCaremark ( CVS - Get Report) spent the first half of the year with egg on its face. This February, in fact, Delaware Chancellor William Chandler -- charged with overseeing the controversial CVS-Caremark merger -- actually compared Caremark's board to
2. Zimmer's Changing WaysZimmer ( ZMH) better have a Plan Z. The Indiana-based device maker flourished when it could make big payments to orthopedic surgeons, who helped drive the company's prices and market share ever higher. But Zimmer caught the government's attention in the process. To be fair, in recent years, the government has investigated five major orthopedic companies suspected of rewarding physicians with illegal kickbacks. But when it came time to settle this fall, it slapped Zimmer with the biggest fine by far. Zimmer will pay more by itself than will the other four companies combined. JPMorgan analyst Michael Weinstein suspects he might know why. During the first 10 months of this year, he notes, Zimmer spent $85 million -- or 6.2% of its sales -- on royalties and consulting fees. The company doesn't even invest that much in research and development. "At Zimmer, more than 100 institutions or surgeons were paid in excess of $100,000 over the last 10 months," Weinstein marveled. "Moreover, 21 received in excess of $1 million. ... These figures are fairly remarkable and, in the coming year with the new level of disclosure and oversight, it will be interesting to see the degree to which these payments change and what impact it has" on physician relationships and the company's market share. Credit Suisse analyst Kristen Stewart suspects she already knows. "With an even playing field, we believe it is possible that those that gained market share as a result of physician contracts may now be at risk," Stewart warned when initiating coverage of Zimmer with an underperform rating last month. And "over the past five years, Zimmer has had the greatest market share gains. "We believe new product introduction and greater scale were principle drivers, but there is the possibility that some consulting agreements may have shifted some incremental market share." Funny how that works, eh? Dumb-O-Meter Score: 92. "We believe that Zimmer is well positioned to abide by the requirements of the settlement," the company said, "due to our current corporate compliance program, which we began developing in 2004 and implemented in 2005." It's nice how that program has allowed generous physician payments to this day.
3. Roche's Second ChanceRoche has now paid big bucks for the same company twice. The Swiss health care giant this year paid hundreds of millions of dollars for the remnants of a diagnostics company that it once gave away. Less than five years ago, following a tough courtroom battle, Roche agreed to pay $1.4 billion for a tiny outfit known as Igen. But Samuel Wohlstadter, Igen's crafty founder, arranged that sale with some crucial strings attached. Specifically, Roche had full rights to use Igen's technology for traditional patient tests, but not for special purposes such as drug trials and animal studies. Roche gave those rights to a new company, spun off to Igen shareholders, known as BioVeris. Soon, however, BioVeris suspected that Roche might be breaking its promises. If true, based on the rules of the original deal, Roche would have to give BioVeris much of the revenue it realized from any "out-of-field sales." BioVeris started keeping track, estimating that it could pocket some $5.3 million for every 1% of the sales Roche made outside its approved arena. Apparently, with the evidence mounting and the bills piling up, Roche figured it would probably have to take its medicine once again. So this year,
4. Omnicare's Blame GameOmnicare ( OCR) has become an expert at the blame game. Every quarter, the Kentucky-based institutional pharmacy misses Wall Street estimates and somehow holds UnitedHealth ( UNH - Get Report) responsible. Certainly, Omnicare's results have been devastated by cut-rate payments from the giant health insurer. However, this is nothing new -- as is evidenced by the two companies' ongoing court battle -- so it's hard to understand the surprise factor here. Still, the surprises kept surfacing this year. And Omnicare kept acting as if it somehow had everything under control. Quarter after quarter, the company pointed to the same old remedy -- known as "The Omnicare Full Potential Plan" -- as the cure for all its ills. "Clearly 2007 is a year of rebuilding and repositioning. But longer term, we believe the fundamentals underpinning our business remain intact and our strategy appropriate," CEO Joel Gemunder vowed when releasing the company's first quarterly disappointment of the year. "The Omnicare Full Potential Plan exemplifies this strategy." Every time investors thought that Omnicare would finally hit that potential, they saw their hopes shattered instead. They weathered another big scare this fall, when Omnicare released its third-quarter update on none other than Halloween Day. "Trick or treat!" Bear Stearns analyst Jason Gurda piped. "No candy from OCR." Then came some even spookier news. In early November, UnitedHealth revealed that it had received a subpoena seeking information about Omnicare's Medicare-related business. Based on UnitedHealth's disclosure, the government suspects that Omnicare could be inappropriately steering Medicare patients toward certain prescription drug plans. To be sure, Omnicare could probably get better rates from other insurers than it does from UnitedHealth. But the government apparently frowns on that sort of manipulation. Thus, it seems, Omnicare still needs some cooperation from UnitedHealth to meet its "full potential" once again. Dumb-O-Meter Score: 85. "For the last several quarters, OCR shares have run up ahead of the company's earnings release only to get knocked back down when the company misses the quarter and reduces guidance," Gurda observed this Halloween. Incredibly, "it happened again this morning."