Coutts Hero Image

Tackling cost pressures in healthcare

SHARE

Summary

Healthcare innovation has been a major reason for the increasing life expectancy globally, but costs are rising.

4 min read

Human beings today generally live longer and healthier lives than at any point in history. Life expectancy has almost doubled in the developed world in the past 100 years due to factors such as rising incomes, better education and cheaper food, as well as long periods of relative peace. The most significant driver has, however, been the unprecedented advances in healthcare.

These cures and treatments have come with an associated increase in costs – most European countries spend around 10% of GDP on healthcare and the dysfunctional US system is now at 17% of GDP, or $10,000 per person per year. How are politicians and the industry balancing the ceaseless growth in demands and the related growth in costs?


A CENTURY OF INNOVATION

The early 20th Century was a period of transformational innovation in medicine. In the 1920s, Dr Frederick Banting was the first person to use insulin as a treatment for diabetes - a condition which had been fatal up to this point. Of equal importance was the inadvertent discovery of penicillin in 1928 by Alexander Fleming. Eventually mass produced during the Second World War, this first antibiotic would go on to save the lives of millions and open up an entirely new field of medicine.

The post-war years saw an acceleration of important medical breakthroughs. Vaccines meant that killers such as polio, tuberculosis and tetanus have been largely consigned to history in the developed world. Cancer survival rates have doubled on average in the past 40 years. And innovations to help lower blood pressure and cholesterol such as Pfizer’s statin, Lipitor, have seen a reduction in fatalities from heart disease – still the number one cause of death in the West.

“Of the 13,000 identified diseases which could affect a human, only around 500 are classed as curable, many even lack a diagnostic test”

THE INNOVATION DROUGHT

Despite all these innovations and continued rises in Research and Development (R&D) spending, the pharma industry suffered an innovation drought in the first decade of the 21st Century. Between 2005 and 2010, the average number of ‘new molecular entities’ approved by US regulators was just 21.8. To put this decline in context, there were as many as 53 new drugs approved in the USA in 1996.

The drought in innovation coincided with a number of successful drugs coming off patent. This resulted in a ‘patent cliff’, where big pharmaceutical companies lost market exclusivity on some of their best selling treatments and failed to develop new drugs to offset the decline in revenue. Share prices in the healthcare industry stagnated before declining sharply towards the end of the decade.


THE BIOTECH BOOM

In recent years, we have seen a revival in the prospects of the healthcare sector, spearheaded by an innovative category of drugs know as biologics. While traditional drugs are chemicals synthesized from other chemicals, biologics are derived from living cells. They have the potential to offer more targeted treatment than conventional chemical drugs but tend to be much more expensive due to the complex manufacturing process.

This new category of drug has proven extremely lucrative for the healthcare industry. AbbVie’s Humira, a biologic medication used to treat rheumatoid arthritis, generates revenues in excess of $10bn a year. The next big leap forward which the industry is pursuing is gene editing – the ability to insert, delete or replace parts of a human’s DNA, potentially curing a series of diseases related to fundamental faults in an individual’s genetic make-up – this will not come cheap, however.


POLITICAL RISK

Despite the excitement surrounding the potential of biotech and gene editing, the healthcare share index has been relatively weak following increased focus on the industry linked to a Tweet from Hillary Clinton in which she pledged to combat the high cost of prescription drugs in the US, sparked by an egregious price rise on an HIV drug. Pharma companies bounced strongly after Donald Trump became President-elect.

In response to this, the healthcare industry cites the high levels of investment they make in R&D and the time it takes to get a product to market. Indeed, almost half of all corporate research and development spending in Britain this year has been carried out by the pharmaceutical and healthcare industry.

More conflicts over pricing look certain as governments and insurers battle to contain rising healthcare costs from an ageing population.

Become a Client

Great relationships begin with an introduction. We would be delighted to welcome you to Adam.

Discover more
innovation-in-pharma

LOOKING FORWARD

Better education and prevention will surely remain important – for example, the falling rates of smoking – but demographics are on the side of the pharmaceutical industry and despite the innovations of the past 100 years, there are still a huge number of unmet needs. As such, the companies best placed to succeed are those that can offer genuine cures where there are currently none such as dementia and many cancers, those developing new antibiotics and those which offer effective treatments which also serve to reduce healthcare costs.

Prevention, in the form of new vaccines, is an extremely cost effective way of dealing with the misery of malaria, dengue fever and meningitis, for example, and should eliminate cervical cancer in a generation for a few tens of pounds per patient. Cost savings are designed within devices such as Smith & Nephew’s new replacement knees which have fewer steps to install, shorter recovery times and last longer. These are selling well due to the cost savings they bring.

In summary, the healthcare industry has huge opportunities ahead, but healthcare systems around the world are increasingly asking them to help reduce overall costs as part of their innovations.

ABOUT ADAM INVESTMENTS

We offer discretionary investment management to individuals and their families, and to charities. We take a long term approach to investing and we believe this gives us an advantage in a world where markets and media are increasingly focused on short term news.

DISCOVER MORE ABOUT ADAM INVESTMENTS