Asset Management Equity Business Thematic

Asset Management Equity Business Thematic

March 2016
Asset Management Equity Business
Thematic Equities: Security & Safety
The coming disruption in the healthcare industry: Opportunities for security & safety investors?
Dr. Patrick Kolb, Fund Manager, Credit Suisse
«One of the greatest pains to human nature is the pain of a new idea»
Walter Bagehot
Dear Reader
Healthcare costs are a growing burden for our society and we strongly believe it will continue to rise in the long
run. Just looking at the United States, the general budget trends are worrisome: The Congressional Budget Office
of the United States (CBO) recently published the budget and economic outlook from 2015 to 2025. According to
their projections, the US budget deficit in 2025 is projected to be USD 1.1 trillion (or 4.0% of GDP) and the
cumulative deficits over the 2016 – 2025 period are projected to total USD 7.6 trillion1. The key factors for that
persistent deficit are the retirement of the baby-boom generation, the expansion of federal subsidies for health
insurance, increasing healthcare costs per beneficiary and rising interest rates on federal debt. As of 2025 nearly a
quarter of US GDP will be spent on healthcare alone, compared to around 16.4% as of today2.
Clearly, long-term budget projections are highly uncertain. Trends such as the aging of the population or the
growth in per capita spending on healthcare are expected to significantly increase public spending even beyond
2025. If the current system remains, the CBO estimates that federal public debt would exceed 100 percent of
GDP by 2039. This is about equal to the percentage recorded just after the Second World War3.
We believe such a cost development is not sustainable. Just take an example from the healthcare industry: On
average it currently takes up to 12 years and USD 2.5 billion4 to develop a new drug, and only five in 5’000 of
these new drugs are making it to human testing and only one of the five will be approved by the Food and Drug
Source: CBO (2015): The Budget and Economic Outlook: 2015 to 2025, p. 15, URL: https://www.cbo.gov/publication/49892,
7.3.2016.
2
Source: OECD Health Statistics (2015): Focus on Health Spending, July 2015, p. 2, URL: http://www.oecd.org/els/ healthsystems/health-data.htm, 7.3.2016.
3
Source: CBO (2015): The Budget and Economic Outlook: 2015 to 2025, p. 26, URL: https://www.cbo.gov/publication/49892,
7.3.2016.
4
Source: Scientific American (2014): Cost to Develop New Pharmaceutical Drug Now Exceeds $2.5B, in: Scientific American, Nov. 24th
2014, URL: http://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/, 16.3.2016.
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March 2016
Administration (FDA) for human use5. In our opinion, novel approaches in technology are urgently needed to
mitigate this cost trend in the healthcare industry.
Can technology mitigate rising healthcare costs?
The Singularity University in San Diego, USA is organizing every year the exponential medicine conference. Their
aim is to explore how technology can reshape the healthcare sector. According to the proponents this industry has
to shift from a symptom/fee-based and reactive model to a predictive and value-based medicine. Scientists are
predicting fascinating future trends in this field and believe technology is going to revolutionize the entire healthcare
industry6. In this context we want to highlight three interesting areas:
1) Genomics: The cost of Fig. 1: The costs of DNA sequencing
DNA sequencing has
been declining 3-times
faster than Moore’s Law7
would foresee, plummeting from USD 100
million per genome in
2001 to about USD
1’000 per genome today
(fig. 1)8. It is expected
that by 2019 more than
two billion genomes will
be sequenced, including
50
million
human
9
genomes .
When
a
person’s
sequenced
genome is compared to
millions of other people’s
genome and other health Source: Nature (2014)
datasets,
big
data
technologies such as machine learning and data mining technique can analyse certain traits of health risks
or diseases and recommend possible prevention measures, treatment or therapies10.
2) Artificial intelligence: As an example, Johnson & Johnson, the world’s premier manufacturer of
healthcare products, is collaborating with IBM Watson Health, a question answering computer system
developed by IBM. This IT system uses more than 100 different techniques to identify and analyse sources
and evidences11. Their aim is to conceptualise about how to read and understand scientific papers and
Source: Lipsky et al. (2001): From Idea to Market: The Drug Approval Process, in: Journal of the American Board of Family Medicine,
Sept./Oct. 2001, p. 365, URL: http://www.jabfm.org/content/14/5/362.full.pdf+html, 7.3.2016.
6
Source: Diamandis (2015): Exponential Medicine: Healthcare Is Broken, Here’s How We’re Going Fix It, URL:
http://singularityhub.com/2015/11/10/exponential-medicine-healthcare-is-broken-heres-how-we-are-going-fix-it/, 8.3.2016.
7
According to the Moore’s law, processing power doubles roughly every two years as smaller transistors are packed ever more tightly onto
silicon wafers, boosting performance and reducing costs (source: Moore, G. (1965): Cramming More Components onto Integrated Circuits,
in: Electronics, pp. 114 – 117, April 19th 1965)).
8
Source: Nature (2014): Technology: The USD 1’000 genome, in: Nature, March 19 th 2014, URL:
http://www.nature.com/news/technology-the-1-000-genome-1.14901, 11.3.2016.
9
Source: ARK Invest (2014): Heading for USD 100: The Declining Costs of Genome Sequencing & The Consequences, Aug. 21st 2014,
URL: http://ark-invest.com/genomic-revolution/declining-costs-of-genome-sequencing, 14.3.2016.
10
Source: MIT Review (2016): DNA App Store, in: MIT Technology Review: 10 Breakthrough Technologies, Vol. 119, Nr. 2, March/April
2016, p. 53.
11
IBM Watson is a cognitive system designed to mirror the human learning process, but without the burden of biases arising from memory
and the limitation of time. In a world of rapidly expanding data the latter is particularly important. Humans alone simply cannot make sense of
all of the information being produced every day (Source: IBM (2011): DeepQA Project: FAQ, URL:
http://researcher.watson.ibm.com/researcher/view_group_subpage.php?id=2159, 14.3.2016)).
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March 2016
clinical trial outcomes12. According to the Memorial Sloan-Kettering Cancer Center in New York, a human
doctor needs at least 160 hours of reading every week just to keep up with the latest medical knowledge.
IBM Watson Health has processed more than 2 million medical journal pages and 1.5 million patient
records. In tests, IBM Watson Health’s successful diagnosis for lung cancer is 90 percent (compared with
50 percent for human doctors)13.
3) Robotics: Increased precision, accuracy and mobility of medical robots will improve surgical outcomes and
enable more patients to receive treatments. Going forward we expect the development of a new
generation of surgical robots which can conduct autonomously routine surgeries without human error at a
lower cost.
The cost savings within the global healthcare sector could exceed USD 1 trillion by 2025, according to a study by
the George Mason University. This is mainly driven by productivity gains through usage of big data, machine-tomachine communication technologies, smart device monitoring and adaptation14. McKinsey calculates that the use
of big data technologies could reduce healthcare costs in the US alone by up to USD 450 billion. Especially
individual screening of patients combined with an assessment of personal health risks can result in patient-specific
treatment15. Additionally, a recently published five year case study conducted by St. Jude Medical, a provider of
cardiovascular products, showed that remote heart patient monitoring results in cost savings of over USD 370’000
per 100 patients annually. The study itself covered 90’000 participants with pacemakers, implantable cardioverter
defibrillators (ICDs) or cardiac resynchronization therapy (CRT) and found that over USD 333 million for
unnecessary hospitalisations and hospital days were avoided16.
Conclusion
Although the healthcare industry has lagged in the use of big data to other sectors such as the retail industry —
partly because of concerns about patient confidentiality — we believe it could soon catch up. In our opinion this
sector is going to undergo disruptive changes, due to the exponential growth of data such as medical records,
clinical research, digitized diagnostics, sensors or wearable devices. First movers in this area are already achieving
positive results, which is surely prompting competitors to take action. These developments are encouraging for
consumers, patients and taxpayers, but they also raise an important question: Is the healthcare industry prepared
to capture the full potential?
At Credit Suisse, we believe that disruptive technologies in the field of human healthcare is in its first inning of its
growth rate. But, as it has been recently reported in the Financial Times, we also think about possible
consequences from a security and safety point of view17. As our society becomes digitized and people rely more
and more on computers, cyber risks (including data breaches and data losses) will grow. Therefore we believe an
adequate privacy policy and excellent data protection are necessary conditions to be fulfilled, otherwise the
discussed cost saving potential will be rather limited. As a consequence we are long term shareholders of leading
companies with a special focus on safety and security such as big data analytics, data protection and encryption.
For further information (such as current fund factsheet, performance or quarterly comments) please click here.
Source: Johnson & Johnson (2015): Johnson & Johnson and IBM Announce Plans to Collaborate on Advanced Solutions Designed to
Transform Healthcare Delivery, media release, April 13th 2015, URL: http://www.jnj.com/news/all/Johnson-Johnson-and-IBM-AnnouncePlans-to-Collaborate-on-Advanced-Solutions-Designed-to-Transform-Healthcare-Delivery, 14.3.2016.
13
Source: Steadman (2013): IBM's Watson is better at diagnosing cancer than human doctors, in: Wired, Feb. 11 th 2013, URL:
http://www.wired.co.uk/news/archive/2013-02/11/ibm-watson-medical-doctor, 14.3.2016.
14
Source: Thierer/Castillo (2015): Projecting the growth and economic impact of the internet of things, June 2015, in: Economic
Perspectives, p. 2, URL: http://mercatus.org/publication/projecting-growth-and-economic-impact-internet-things, 8.3.16.
15
Source: McKinsey (2013): The big-data revolution in US health care: Accelerating value and innovation, April 2013, URL:
http://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/the-big-data-revolution-in-us-health-care, 11.3.2016.
16
Source: Settles (2015): Remote Patient Monitoring in Healthcare, in: TechnologyAdvice, June 15th 2015, URL:
http://technologyadvice.com/medical/blog/remote-patient-monitoring/, 14.3.2016.
17
See Financial Times (2016): Healthcare sector warned to be alert for hack attacks, in: The Financial Times, The Connected Business,
Special Report, March 2nd 2016, p. 3.
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March 2016
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