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Disrupting the healthcare sector

by  Alex Hunter  |  04 Jun 2019

524 - Disrupting healthcare

It’s little known that Alphabet – the parent company of Google – owns 186 healthcare patents. While technology has revolutionised the industry’s ability to discover new medicines, the rest of the healthcare industry has seen limited change.

Changes in the management of clinics and hospitals have progressed more slowly than other sectors due to concerns over confidentiality and structural issues. But over the long-term, care is expected to improve.

Investors can benefit over the medium-term from those companies already using technology to improve their business models and the experience of disease sufferers. Over the longer term, technology is likely to personalise patient services.

Two speeds

There has been a bifurcation in how technology has impacted the drug development sector and the overall healthcare sector.

Rapid advances have allowed research and development departments to sequence the human genome more rapidly, facilitated the storage of huge amounts of data and most importantly to attempt to spot patterns hidden within this vast pool of clinical and genetic data.

As a result, the drug innovation process has become much more efficient over the past two decades leading to a surge in innovative new therapies. The number of new drugs being approved in the US (both small and large molecule) has increased rapidly from a recent low point of just 18 in 2007 to a record high of 59 in 2018.

But in the healthcare sector – which represents 96% of total healthcare costs – technological progress has lagged other consumer-focused sectors, such as retail and banking. Two areas ripe for innovation are the distribution of drugs and the curation of medical records.

Structural issues

Of the two, the latter is the most challenging. There are numerous problems. Not all medical records have been digitised with paper copies still existing. Those which have been digitised are often compartmentalised in different IT systems which makes it difficult to share information.

In addition, the medical industry is conservative and slow-moving. This is understandable: there are heightened concerns over this protection of patient’s confidential medical records.

Nor is the structure of healthcare provision conducive to technological advances. In the US, the system is divided up between different insurance companies and health management organisations, making it harder to design a universal system.

In Europe, a universal system is easier to develop because governments are the principal providers of healthcare but implementation is slowed down by political process and budget constraints.

But if these considerable obstacles could be overcome, patient care would improve as it would become easier to diagnose disease more rapidly and more accurately. It will also allow health care to become more personalised.

It’s unlikely, however, the US will adopt a universal system or that European governments will become more efficient at delivering change. Attempts to impose change on these systems have proved slow, inefficient and frequently blow up.

Agents of change

It’s more likely a technology giant, such as Amazon and Google, will build up a core of competences. The technology is likely to outstrip confidence in the system which means the initial adoption of these new systems will be small and low key.

The first step is to work with other companies such as the Haven joint venture between Amazon, Google, Berkshire Hathaway and JP Morgan. This collaboration will act as a testing ground.

Once the technologies have been proven effective, it is hoped confidence will build and will gradually expand across the healthcare system, as different technologies are merged and acquired.

While this is a long-term investment opportunity, it is hard to pick the winners at the moment because the trend is so nascent. And many of the most interesting companies are part of the technology giants, making it hard to isolate this development.

Pick the early adopters

But there are companies which are already using technology to make patient care more efficient and personalised. Fresenius Medical Care, which provides dialysis for those suffering from end-stage renal failure, is a good example.

Fresenius is the poster child for turning the treatment of one disease into a quasi-care organisation. Through specialisation and the use of technology they have managed to lower the cost of treating a patient with kidney failure from $90,000 to $80,000. This has reduced the cost to the healthcare provider and bolstered the company’s profit margins.

Patient experience has also improved. Sufferers of kidney failure have multiple complications. Rather than having to visit different specialists in different clinics, care is now coordinated in one location and there is greater communication between the different doctors. This allows potential complications to be spotted earlier and nipped in the bud.

The use of technology to make the healthcare sector more efficient is still in its infancy but this trend will grow over the next five years and become one of the most important affecting this sector. Investors should monitor it closely.