The pace of innovation in healthcare is increasing thanks to a powerful convergence of science and technologies experiencing accelerating progress. As gene sequencing, machine learning, powerful imaging, sensors, gene and cell therapies make their way out of academic labs into everyday healthcare, our approach to healthcare is changing. For the first time, not only can we pinpoint the molecular and genetic causes of disease, but we also have the technologies to access them. On the back of this, prevention and cures are becoming possible. Can we afford them?
Where the tensions lie
Health Benefit Consultants, Share Your Expert Insights in Our Survey
Marina Record Marina Record is an Investment Manager at the Baillie Gifford Health Innovation Fund. She joined Baillie Gifford in 2008 as a portfolio analyst. Marina worked in a number of global teams at Baillie Gifford before joining Long Term Global Growth, where she focused on analyzing companies with the potential for sustained rapid growth. […]
We are in the midst of a rapid acceleration in the pace of scientific discoveries. As this has occurred, the growth in transformative treatments has been accompanied by ever-increasing prices. This has heightened the tension that has always existed in society between the health systems’ profits and patients’ moral right to access treatments affordably. This is not surprising as the matters at stake are of health, life, and death. For a case in point, consider that in developed economies around half of patients with chronic diseases do not take their medicine as prescribed due to cost, leading to complications, premature death, and higher costs for healthcare systems as diseases progress.
The tensions surrounding drug prices are aggravated by bad actors who attempt to profit unduly at the expense of public health. The most obvious example is Turing Pharmaceutical’s 5000% price hike on Daraprim, a rare disease drug used to treat parasitic infections – which earned its chief executive Martin Shkreli the label of “the most despised man in America”. But it’s not just the headline-catching price increases that give cause for concern. Smaller recurrent price increases compound over time. Take Humira, the world’s best-selling drug (circa $20 billion in sales), which is used to treat various conditions from arthritis to ulcerative colitis. Its list price has increased 500% since it launched two decades ago, despite the original patent expiring in 2016.
Understandably, there are recurring calls for heavier regulation surrounding pricing of treatments. The challenge is lower drug pricing doesn’t always lead to better access for patients. There is no obvious answer to balancing paying a fair price for innovation with improving access to treatment, while at the same time ensuring the sustainability of healthcare systems. But there is good news.
As the pace of innovation in healthcare continues to accelerate, it seems increasingly likely that innovation, rather than regulation, will put us on the fastest path to striking a better balance over time. Below are some of the ways in which we anticipate this happening.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Innovation-driven deflation
Biology is becoming a data science problem. This started with gene sequencing at scale as costs declined from $100 million per genome to $500 in the last 20 years and deepened with new tools to study biology in ever greater detail. As a result of this biotech data revolution, we are witnessing a dramatically accelerating understanding of the biology of patient subgroups. As companies are increasingly able to rationally design drugs for patients who are most likely to benefit from them, drug discovery is becoming faster, more predictable, repeatable – and therefore, cheaper.
One of the reasons why drugs are expensive is that success in drug discovery is rare. Historically, nine out of ten drugs failed in clinical trials and biopharma companies would seek to recoup their losses from the one that succeeds. As our ability to control biology is improving, the cost burden of failure is decreasing. Some companies are starting to demonstrate clinical trial success rates north of 60% — more than six-fold the industry average driven by technologies such as machine learning and new drug classes. The more drugs a company can bring to the market, the more leeway it has in pricing its drugs to generate attractive returns, allowing the economies of scale to deflate prices and increase access.
Innovation in treatment approaches
Most healthcare costs today arise because care starts too late. As diseases progress, they become more difficult and expensive to treat. It is estimated that around half of cancers are diagnosed in the emergency department of a hospital after patients arrive in pain. Most diseases are diagnosed and treated based on symptoms, rather than underlying disease biology. That’s why our healthcare systems are often described as “sickcare” systems by those disillusioned with the status quo.
Progress in our understanding of biology is enabling earlier diagnosis and the treatment of disease causes, rather than the symptoms that occur in late-stage disease. This saves costs for the system. Innovative treatments that can cure, slow down or prevent diseases from progressing can end up being cheaper for healthcare systems than long-term chronic care, despite prices that initially seem high.
Innovation in payment models
Transformative treatments pose a challenge for healthcare systems. This is because, while the benefit of a treatment can last a lifetime, the costs are frontloaded. Demand for such treatments can overwhelm payers, whose business models revolve around annual budgets. For instance, Gilead’s drug Sovaldi – a cure for hepatitis C and a real breakthrough – was originally deemed “cost effective, but not affordable” meaning many patients struggled to access it.
New business models aiming to accelerate innovation in pricing and reimbursement are starting to emerge. One of the most intriguing approaches proposes building a large catalogue of medicines to offer to health systems and payers on a subscription basis – to enable unprecedented access to innovative medicines globally.
Competitive innovation
Decades of scientific and technological progress are leading to disease biology being addressed successfully in a variety of ways. This is increasing the number of biopharma companies who may succeed with different approaches targeting the same underlying cause. Over time, we expect this to feed through into more competition and lower drug prices. In this environment the most successful companies are likely to be those that can bring innovative drugs to market rapidly and at scale, thus not relying on a single blockbuster to sustain most of a company’s value.
Innovation in the supply chain
Lower drug prices could also be achieved by innovation in the supply chain. Instead of building expensive lab and manufacturing facilities, companies can now reduce their development and manufacturing costs through outsourcing. Innovative Contract Development and Manufacturers (CDMOs) are enabling small companies to extract the benefits of scale and state of the art research and manufacturing facilities by providing this as a service. This can help to access personalised medicine at affordable prices, even for low volumes.
Investors’ role in innovation
Against a background of increasing innovation, investors can play a critical role in the incentive systems of life science companies. Short term investors may encourage management to set high prices with frequent increases to maximize near term profits. In contrast, supportive long-term, patient capital encourages companies to expand opportunities by investing in teams, technology and science. This increases their chances of success and builds resilience to setbacks. Crucially, it also enables companies to be more ambitious, increasing the potential scale of success and, with it, the chances of becoming one of those rare and valuable companies that can generate extraordinary, outlier returns – for society and for investors.
Photo: adventtr, Getty Images
Marina Record is an Investment Manager at the Baillie Gifford Health Innovation Fund. She joined Baillie Gifford in 2008 as a portfolio analyst. Marina worked in a number of global teams at Baillie Gifford before joining Long Term Global Growth, where she focused on analyzing companies with the potential for sustained rapid growth. It was here that Marina developed an interest in healthcare, intrigued by the accelerating pace of progress in the field. She joined the Baillie Gifford Health Innovation team in January 2018 as a Portfolio Manager, to fully focus her attention on exploring the potential consequences of such progress and how Baillie Gifford can help. Marina graduated from the London School of Economics and the Higher School of Economics in Russia with Bachelor of Science degrees in Banking and Finance and in Economics, having studied in these programs simultaneously.
