A dose of innovation

December 2022

Key Points

  • Transformative new treatments are heightening the tension between profit and patient accessibility
  • Because drug discovery is becoming faster, more predictable and repeatable, it should become cheaper
  • Innovations in treatments, payment models and supply chains should improve both accessibility and our health

All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.

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

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 per cent 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 $20bn sales), which is used to treat various conditions from arthritis to ulcerative colitis. Its list price has increased 500 per cent 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. 

If we as a society are unwilling to pay for those medicines today, they won’t get invented.

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.

Currently, nine out of ten drugs fail in clinical trials and biopharma companies need to recoup the losses for these nine from the one that succeeds. As drug discovery becomes more predictable, the cost burden of failure should decrease. The more drugs a company believes it can bring to the market, the less likely it is to feel pressured to maximise the returns it generates from a single drug. This can be seen with Alnylam, whose five commercial drugs have enjoyed a 60 per cent track record of success through clinical trials, compared to the industry average of 10 per cent. 

AI drug discovery companies are also showing great promise to dramatically reduce the cost of drug development. These companies are using technology to improve the success rate of predictions that can be made in silico to speed up development times and reduce costs. For example, Recursion Pharmaceuticals estimates that it took it 50 per cent less time and 80 per cent less cost to advance its five drugs to the clinic, compared to its estimates of what it would have cost under a traditional approach.

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.

© Getty Images AsiaPac

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. Perhaps one of the most intriguing approaches is led by EQRx. It is building a large catalogue of medicines that it plans to offer health systems and payors 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.

© Bloomberg/Getty Images

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. Companies like Wuxi Bio 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.

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 maximise 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.

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The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in November 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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