In our view, megatrends such as demographics, natural resources, climate change, inequality and digitalisation are the driving forces behind a sustainable revolution. One of the key challenges that our societies faces is the rising burden of healthcare cost. For instance, according to the World Bank, US healthcare expenditure to GDP has moved from 12.5% in 2005 to almost 17% in 2015, and from 8% to 10% for the European Union. In addition, lower middle-income population have a disproportionality higher out-of-pocket expenditure burden than higher income population (57% vs 32%).

We believe that multiple ongoing initiatives will bring solutions to this societal issue. For instance, partnership for employee health should encourage other corporations to do the same, reducing healthcare inequality - an area that the U.S. currently scores very poorly. We look forward to seeing the sector developments within digitalisation over the coming years, from data mining to automation of data capture, which can help bring costs further down.

As part of our work to assess this issue and the relevant progress, we attended the JP Morgan healthcare conference in San Francisco. The overall sentiment this year was, in our view, quietly positive, in stark contrast to the previous year where the excitement was much more palpable.

That said, there was a high degree of innovation in most of the breakout meetings, especially when compared to the lacklustre Consumer Electronics Show, which took place the same week in Las Vegas. This supports our view that the technology innovation cycle is transitioning from consumers to the corporate sector, less visible but with more potential to increase productivity and GDP.

 

Partnerships

As we expected, drug prices were a consistent talking point in most meetings. The general outlook hinted at stabilisation as price inflation settled down to the mid-single digits in 2018.

Conversations also surrounded Amazon and its partnership with J.P. Morgan and Berkshire Hathaway, aimed at improving employee health insurance costs. Amazon’s purchase of internet pharmacy PillPack and their research into electronic medical records and telemedicine were also discussed, with the tech-giant’s ambitions of moving into the market continuing to take form.

We presume Amazon’s unhurried movement into the $8trn sector is due to their innovative nature; announcements such as data mining medical records, a patent for their voice assistant Alexa to detect colds and coughs, teamed with their purchase of the health foods supplier Whole Foods, for sustained health and preventative measures, all signal to potential disruption. This made for some interesting conversation throughout the forum.

 

The next stage in bringing down drug costs

Our discussions with CEOs from several of the sector’s leading companies were centred on digitalisation and its ability to lower the cost of drug development, especially within the latter phases of clinical trials. All new medicines in the U.S. run through a set of clinical phases from 1-4, each with varying lengths and number of subjects. New cancer medicines average a trial time of 8 years¹. Not only have we seen compelling research to support cost reduction, such as the digitisation and automation of data capture, we also believe it could greatly reduce the time of the first three out of the four stages.

That said, similar to banking or capital goods, we believe that the Pharma companies recognize the difficulty of managing and integrating software engineers and statisticians into their operations.

 

What comes next?

As always, the forum hosted a range of start-ups with innovative ideas, many with a common theme that has been emerging over a number of years – machine learning in drug discovery. With techniques progressing and processor speed improving year on year, this is an exciting area of development. We expect this field to grow exponentially. 

We continue to follow healthcare tools in general, with diagnostics showing particularly large upside potential. We have confidence in their likelihood to increase efficiencies and reduce costs overall for better health. A factor we regularly review is the potential for Chinese copycats – we believe the risk is low for diagnostic tools, mainly due to research suggesting President Xi is more likely to buy those tools from established players in the Western World to guarantee a high level of accuracy and safety.
In summary, the conference gave us some invaluable insights and research ideas, and provided evidence of our sustainable megatrends coming to the fore. 

 

Source: LOIM // Bloomberg. // ¹FDA, Drug development research. 
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