There is a revolution in healthcare on the way, driven by innovation in technology, as we witnessed on our latest quarterly research trip to Silicon Valley and Boston, the global epicentres of innovation for the healthcare and technology industries.
We met with more than 25 companies on this trip, some we hold in our portfolios and some we don’t, which allows us to benefit from the full spectrum of opinion and insight. For us, the three key takeaways on the healthcare sector were:
1. Innovators are bending the cost curve of drug development: The percentage of GDP spent on healthcare is in the double digits in many economies around the world – it is 20 per cent in the US. This figure needs to come down and the value creation potential for leading companies here is vast.
The winners will be those companies able to bend the cost curve and enable the rate of cost (of drug development) to increase at a lower rate than the benefit received (from the drug).
2. We are embarking on a gene editing revolution: The first ever gene editing therapy is now approved and on the market. These one-time therapies offer both significant potential opportunity and disruption.
3. AI pioneers are building new barriers to competition: Artificial intelligence deployment in healthcare lags other industries, but AI pioneers are creating new competitive moats versus laggards.
Companies leading on innovation are bending the cost of healthcare and reducing the time it takes to bring drugs to market. This was a topic discussed at every one of our meetings in Boston. Why? Because healthcare carries a significant financial burden.
Bringing a drug to market costs circa $2bn (£1.5bn), takes more than a decade, and even then, only 8 per cent of drug candidates make it through phase three clinical trials successfully.
Over the past 50 years, we have seen a trend play out in biopharma, which is opposite to that of the semiconductor industry.
While compute power has roughly increased tenfold every five years, according to Moore’s law (until Nvidia accelerated this trend and increased compute performance a thousandfold in eight years), the amount of new drugs coming to market per $1bn spent has been falling logarithmically, and in real terms.
This phenomenon has been coined ‘Eroom’s law’ and is the inverse of Moore’s law.
In an industry faced by declining research and development productivity, we believe that companies leading the charge in reversing this trend and reducing the cost burden associated with bringing drugs to market will be the winners of the next decade.
How are these companies going to achieve this? This brings us onto our next key insights.
The gene editing revolution has begun. In our opinion, gene editing and AI are two of the most powerful deflationary forces behind the necessary cost reduction.
Gene editing tools are one-time therapies; one therapy to cure either a common or rare disease, and therefore have the potential to extract pharmaceutical costs out of the system, as well as giving a lifetime of productivity back to patients.
