09 Jan 2012 | Technology

Innovation and Change in Healthcare 

In November 2011, Lauran Halpin, Baillie Gifford's global healthcare analyst, gave a speech in Canada about her 
research on innovation and change in healthcare.

You can read the transcript of this speech below.

 

INTRODUCTION

I’m Lauran Halpin, Baillie Gifford’s global healthcare analyst, and I’m going to be spending the next several minutes discussing with you the role of innovation and change in shaping the future of healthcare....though please remember that I’m not recommending any stocks here...rather talking through the way we think about healthcare research. So let’s get started.

In my role as global healthcare analyst I am asked the same question over and over again: what’s wrong with healthcare in the Western World?  By this, the askers mean why is it broken, why does it continue to cost us so much, and why do we still so frequently generate poor health outcomes?  Why are we not getting healthcare value for money?  And while this is a legitimate, relevant, and fascinating area for discussion to which I am happy to lend my opinion, I can’t help but think that by focussing on what’s wrong with healthcare, we’re missing a trick.

Rather than looking behind us at problems, paradigms, and decisions which have been generated in the past, I think the way we address healthcare’s issues is by facing firmly forward and envisioning how long-term, large-scale innovation and change could completely alter healthcare as we know it.  And there’s a huge amount of seismic change occurring in medicine and healthcare as we speak.  Fearless forward thinking and innovation in the way we understand ourselves and what makes us sick is allowing for huge leaps forward in the way we treat disease today, and is giving us a tiny glimpse of what healthcare could look like in the future.

So let’s take a step back here for a moment.  I know these are lovely, optimistic words and ideas but what am I actually talking about here in practical terms?  And how might we, as investors, take advantage of all this change and innovation as it’s occurring?  As both an investor and a healthcare consumer, I believe the healthcare companies and sectors which can make the biggest positive impact on the industry and society aren’t those which are simply providing whizzy and exciting new technology or treatments.  Rather, the real long-term game changers are those truly innovative companies which provide products, treatments, or solutions which have the potential to not only improve the outcome for the patient but also remove costs from the system.  Many of the more traditional companies in the healthcare sector have heavily entrenched profit positions and therefore have little incentive to actively take costs out of the system by reducing the price of their drugs.    What I’d like to do is to talk about two specific companies which we’re very excited about and which I believe have the opportunity to destroy the traditional healthcare companies’ cushy profit pools.  How?  By facing forward, innovating, and changing the way we understand, administer, and even receive healthcare in order to improve treatment paradigms and reduce an increasingly overwhelming cost burden.  The two companies, one a manufacturer of genomic sequencing machines and the other a robotic surgery company, will hopefully give you a real sense of the themes we’re trying to pick up on as we invest in the healthcare sector on your behalf.

 

ILLUMINA

Wouldn’t it be great if we could not only diagnose and treat disease quicker and easier but maybe even prevent disease from occurring in the first place?  I’m sure most of us would answer that question with a resounding yes it would be great.  Fundamental to making these desires a reality is the ability to understand ourselves and our biology.  Illumina manufactures machines which are making this understanding a reality and, as the industry leader, is going to be able to take advantage of increasing demand for its machines over the long term.  It’s a Californian company which makes kits and machines to sequence both partial and whole genomes.  Every living thing has a genome.  It is the sum total of all the DNA in all the genes we carry in each one of our cells and provides a wealth of information on the diseases we might be most susceptible to, how we might respond to particular treatments, and how we might be wired to respond to our environment or the life choices we make.  Advances in genomic sequencing technology made by Illumina and others have greatly reduced the cost of sequencing, while at the same time vastly improving upon speed and quality.  To give some colour to this, the Human Genome Project which sequenced the first whole human genome back in the early 2000’s, took ten years to complete and cost an estimated $3 billion.  I visited Illumina’s sequencing lab last month where I saw whole genomes being sequenced in under a week for around $5,000.

This extreme decrease in price per genome is, for the first time, allowing scientists to undertake large scale sequencing projects to better understand the genetic basis of what it means to be healthy or what it means to be sick.  This understanding of genetics and genomics on a fundamental level is also allowing us to finally begin to realize the potential of personalized medicine - i.e. using an individual’s unique genetic makeup to tailor healthcare decision making. 

Let’s look at an example here.  Imagine a new born baby has his genome mapped using one of Illumina’s sequencing machines - an occurrence which I think is going to become increasingly commonplace over the coming years.  This child now has his own unique genetic information available to him, his parents, and his physicians from the beginning. True preventative medicine becomes possible, appropriate lifestyle choices can be taken, and potential problems can be monitored.  Prevention and monitoring are much more affordable than acute care and arguably more beneficial to the patient.  Should the child eventually become ill, his genetic information could help diagnose his condition more quickly and accurately and aid his care team in making tailored treatment decisions.  Quicker diagnosis and reduced redundant treatment may hopefully mean a more positive outcome for the patient and less cost for the system.

The industry Illumina is helping to develop is still in its infancy but it’s incredibly important and has the potential to positively impact other areas of healthcare, like diagnostics and drug development.  The impact genomic sequencing is making on medicine is already very large and I believe it’s only going to get bigger over the coming years.  Illumina’s leading position in the industry makes it the go to source for high quality genomic sequencers and the likely recipient of volume growth as more machines are required by an increasing large and differentiated customer base.   

The Scottish Mortgage and Edinburgh Worldwide investment trusts*, managed by Baillie Gifford, currently have holdings in Illumina.

You can find more information on their portfolio holdings on the Baillie Gifford website.

*As at 30/11/2011

 

INTUITIVE SURGICAL

Imagine you’re in the operating room about to undergo an operation.  Would you rather be operated on by a person or by a robot?  If you answered person I’m going to change your mind.  The second company I want to talk about is quite literally a different beast altogether.  Imagine for a moment a giant robotic tarantula, each highly articulated leg ending in a finely engineered surgical instrument or 3D camera.  This gigantic surgical spider is the Da Vinci robot from a company called Intuitive Surgical and it’s revolutionising the way we conduct surgery.

The robot, controlled by a physician using a 3D viewing screen and a simple set of handheld and pedal controls, undertakes keyhole surgery with a far steadier hand and a greater range of motion than any human surgeon could ever hope to achieve.  This means smaller incisions, less displaced or injured tissue, and more precise actions than traditional large incision or keyhole surgery can offer.  The benefits are attractive: shorter recover times, less onerous post operative pain, and better short and long-term return to functionality. 

So robotic surgery using the Da Vinci has the potential to not only lead to a better experience for the patient, but also make surgical procedures less expensive due to the need for shorter hospital stays, less pain medication, and less time off work for recuperation.  Good for the patient and good for the payer (insurance companies and governments)....innovative symbiosis at its best.

The opportunity for Intuitive Surgical to grow and increase the penetration of the Da Vinci over the next several of years is extremely exciting.  Right now, the Da Vinci is used primarily for prostatectomies and hysterectomies....in the US, the majority of these procedures are now done on the robot.  But this is just the beginning.  Intuitive Surgical is currently trialling and re-tooling the robot for several other types of procedures - everything from heart surgery to joint replacement.  We’re also really beginning to see interest from patients in robotic surgery given its obvious benefits.  Patients are actively seeking the robot out for their procedures and many physicians and hospitals which don’t have a Da Vinci are being pressured by both patients and payers (insurance companies and governments) to bring one in. 

And just to be a bit provocative, let’s think about Intuitive’s opportunities over the longer term.  Imagine a day when Da Vinci becomes so skilled and commonplace that we look back with horror at the barbarism of traditional surgery and wonder how we ever survived without the robot.   Imagine a day when a doctor sitting in his office in New York uses the Da Vinci to operate remotely on a young child in Africa or a Marine on the battlefield in Afghanistan.  I think Intuitive Surgical is a great example of the type of innovative companies I’m so passionate about uncovering.  It’s a leader in one of the most important fundamental areas of change in healthcare now and in the future and it has a real opportunity to shift the way we deliver and receive surgical care for many years to come.  

The Scottish Mortgage, Monks, Edinburgh Worldwide and Mid Wynd investment trusts*, managed by Baillie Gifford, all currently have holdings in Intuitive Surgical.

You can find more information on their portfolio holdings on the Baillie Gifford website.

*As at 30/11/2011 

 

CONCLUSIONS

I hope these two companies have given you a flavour of how excited I am about the sector as well as the types of companies we’re attempting to uncover with our healthcare research at Baillie Gifford.  Here’s a thought: you’re much better at predicting the future if you’re part of making it.  The companies I spend my time trying to uncover, including Illumina and Intuitive Surgical, are attempting to do just that.  Optimism, innovation, and a preference to focus on the future rather than what’s gone wrong in the past are driving large-scale, long-term change in healthcare.  Aligning ourselves with companies like this, which we feel have the potential to really improve the patient experience while making healthcare less onerous to society, is likely to mean that returns to us as investors on your behalf should be attractive.  Healthcare is an incredibly fast paced, diverse, and dynamic sector and it’s been a pleasure sharing some of my thoughts on it with you. 

Please be aware that investments can go down as well as up and you may not get back the amount originally invested.

The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

This article contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research. 

Lauran Halpin
Lauran graduated BSc in Biology from Davidson College, North Carolina, in 2003 and gained an MSc in Ecological Economics from Edinburgh University in 2005. Lauran joined Baillie Gifford in 2007. Having previously worked as an Investment Analyst in our North American Equity Team, Lauran is now a Global Sector Specialist.