13 Jul 2010 | Technology

Investment in Modern Health 

Innovations in technology and the rising cost of health care are creating exciting opportunities for investors, says Colin Renton.

Spending on health care in the United States exceeded $2,300bn in 2008 – the most recent year for which final figures are available. That was more than three times the $714bn costs incurred in 1990. The extent of the upward trajectory in outlays is illustrated to even greater effect when considering that the total in 1980 was a relatively modest $253bn.

The current figure represents around 16 per cent of US gross domestic product. However, the Congressional Budget Office is projecting that overall spending on health care could rise to 25 per cent in 2025 and 37 per cent in 2050, placing a huge and possibly unmanageable burden on the economy.

AGE OLD PROBLEM

Although these figures relate to the US, where per capita spending is higher than elsewhere, rising trends in the cost of health care are common. A large part of this increase relates to the demographics of countries in the developed world. Health care costs nearly four times as much for a person aged above 65 than it does for someone younger. So, as the population becomes progressively older on average, over the next decade and beyond, this pressure will intensify.

A second factor is cost inflation, which is driven by the launch of expensive drugs and treatments for conditions that were previously considered incurable. For example, the manufacture of monoclonal antibodies for rare diseases has pushed up prices to a point where some drugs in the US now cost more than $200,000 per patient per year.

It is, therefore, little wonder that President Obama was determined to succeed where several of his predecessors had failed and implement a significant reform of the health care system. As he said at the time of introducing his proposed changes, “Make no mistake: the cost of our health care is a threat to our economy. It is an escalating burden on our families and businesses. It is a ticking time bomb for the federal budget. And it is unsustainable for the United States of America.”

EARLY DETECTION

While little can be done about the demographic profile of a country, technological innovation at least offers the potential to reduce the cost of treatment. There are two ways to achieve this. The first is by enabling earlier detection of diseases. The second is by reducing the burden on doctors.

Being able to make a diagnosis sooner is important because it is generally cheaper to treat a disease when it is earlier in its development. A good example of this is cancer, where early detection eases the need for drastic or expensive treatment. It also increases the likelihood of remission or cure, which means less demand for expensive palliative care. Reducing the reliance on doctors is important as they represent a significant cost. Unlike pills and machines, doctors are expensive to train and there are few economies of scale in a system of one-on-one physician to patient treatment. Currently, more than half of US health care spending is on hospital and physician services. Therefore, reducing the costs in this area could have a telling impact on overall costs.

A significant part of any solution is the development and use of technology. Among the likely winners from this are taxpayers and some drug companies. The former will benefit from lower health care costs and the overall benefit to economic productivity from improved health. Meanwhile, the biggest gainers in the latter group will be those able to use the technology to improve the efficacy of drugs.

COMPUTING THE SAVINGS

Identifying the companies that are best placed to flourish will be crucial to investing successfully. These companies may include those that manufacture the equipment that has been particularly widely adopted by hospitals. However, many of the successes have been start-ups and smaller divisions of global corporations, which means that investors are exposed to the whole business, not just the manufacturing (including surgical robotics).

Naturally, there will also be losers and some companies will fail. Those who appear most at risk include some pharmaceutical companies, which will see a fall in demand for lifestyle drugs and a reduced requirement for expensive late stage treatment medication. There may be a similar impact on medical device makers.

There are already signs of strong growth in robotic surgery. From a cost point of view, this area brings great benefits. The less invasive nature of the procedure means that patients recover from the operation more quickly and therefore spend less time recuperating. A reduced complication rate also brings down costs. With a day in hospital in the US commonly estimated to cost around $2,000, the savings made through wider use of robotic surgery could be considerable.

STOCKS LOOKING HEALTHY

Investment managers are already seeking out stocks that are well placed to benefit from the health care reforms. There is a growing focus on biotech companies, and those that offer a technological solution to the financial pressures within health care. Investors’ concerns about the reforms have been damaging for biotech stocks and this has created a buying opportunity. The main challenge is identifying the stocks with the best prospects. Consequently, the Monks Investment Trust has sought to take advantage of current weakness by investing in a basket of biotech companies.

Among companies with a technological bias, emphasis has been on identifying those which address patient needs efficiently. The key to this is the benefit encapsulated in the term ‘minimally invasive surgery’, treatment carried out while using robotics.

This is the area where the most attractive investment opportunities are believed to exist. The scope for development here was underlined by a groundbreaking gall bladder operation in 2001, performed on a patient in Europe by a doctor using a machine in the US.

Among the early movers in this group is Intuitive Surgical, which is held by Scottish Mortgage Investment Trust. Intuitive manufactures and sells the daVinci Surgical System. This robot is operated by a doctor and used to insert heart valves, and to cut out cancers and troublesome organs. Approximately 205,000 da Vinci procedures were performed in 2009, an increase of 51 per cent from 2008.

The doctor’s hand motions are reduced and stabilised, while a stereoscopic camera with variable lenses magnifies the target area onto a 3-D screen. The surgeon’s console looks like a giant plastic headset, and is operated by grasping the master controls below the display. “To the surgeon at the helm,” Scientific American marvelled when the machine was launched, “an artery is like a garden hose.”

Several small incisions instead of a single large one, as is the case with traditional treatment, usually means less bleeding, less tissue damage and fewer complications, translating into faster recovery, shorter hospital stays and lower costs. While sceptics claim that the financial savings can be hard to quantify, and the cost of equipment is substantial, the machines have been selling well.

FUTURE SCIENCE

However, there is much more to Intuitive Surgical than growing sales of the robots, which make up 47 per cent of the company’s revenues. In addition to this, 37 per cent comes from instruments and accessories used in each operation and which are not re-used, costing $1,500- 2,000 for each procedure, and a further 16 per cent from service and training contracts. Driving forward the population and usage, of robots therefore creates a stream of revenue that ought to grow substantially in the future. Naturally, competition could force prices down substantially although this is not currently the case.

In assessing ways to alleviate cost pressures on the health care sector, innovation and technology are only part of the solution. However, it is equally certain that scientific advances in the fields of genetics, computing and materials science are providing ever-improving tools to researchers who are working to create cost saving technologies. From an investment manager’s point of view, this fertile environment for innovation throws up many potentially exciting growth prospects.

 

Please remember that ongoing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount invested. By nature, specialist investments can carry higher levels of risk and should be considered only as part of a balanced portfolio.