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Macroeconomic trends in the healthcare sector

04 January 2018

As early and growth-stage investors we are obsessed with understanding where value creation will lie in the future. For Mercia’s Life Sciences & Biosciences team, this means focusing on the areas of healthcare where we can have the maximum impact on improving patient outcomes and reducing healthcare system costs. In this article, Dr Ash Patel explores the macroeconomic trends that we believe will drive value creation in healthcare for the next generation of businesses.

Increased life expectancy and the aging population

Let’s start with a big one. This is probably the single greatest challenge facing our societies at present. Modern science (and with it modern medicine) has been an overwhelming success in the human story. The average life expectancy of an individual living in a developed economy has grown consistently since World War 2, resulting in a female child being born in the UK today expecting to live to 82.8 years on average compared to 71.5 years for the same child being born in 1951. This is as a result of improved childhood survival due to vaccines, the massive reduction in infectious diseases over this period, and the increasing availability of treatments for chronic illnesses such as hypertension and heart disease.

Along with challenges posed to governments about how best to provide long-term pension incomes for a population now living for significantly longer than previous generations, a significant challenge lies in the provision of healthcare. Many of the healthcare systems we have in Europe and North America were originally designed in the period after the Second World War, when the population demographics were entirely different. As a result, a new generation of technologies are required to reduce the cost of caring for an increasingly elderly population, whilst also dealing with the physiological challenge of providing interventions for the elderly. Surgery and anaesthesia were always designed with young patients in mind, and as our population ages, we are going to have to develop better technologies that are more suitable for dealing with patients with multiple existing health issues, but still expect (and deserve) a high quality of life post-care. These technologies must work both en-masse and at scale, in order to bring down the cost of complex care which is vital for the NHS.

As a trained hospital intensive care doctor, it’s clear to me in the clinical environment that new technologies are needed to ensure older people can benefit from surgeries that both prolong and improve the quality of life. At Mercia, we believe the next generation of technologies that help this segment will be drivers of innovation and value generation. Companies like Canary Care (a Mercia Technologies PLC portfolio company) are building technologies that help older people live independently for longer, bringing dignity for users, peace of mind for carers, and reduced costs for payers like the NHS or local councils who will potentially have fewer people needing expensive residential care. We believe companies like these will form vital parts in a healthcare ecosystem geared towards an older population.

Acceleration of development in “emerging” markets

Over the last few decades, the majority of commercial interest in healthcare has been focused on Europe and North America, but the coming years will see an increase in expenditure from high-growth “emerging” markets. The BRICS countries (Brazil, Russia, India, China and South Africa) have seen pharmaceutical sales double between 2006 and 2011 – so crucially, maintaining cost-effectiveness at a scale is of paramount importance. These high growth markets consist of a blend of public and private care provision and encourage a consumer mentality towards purchasing care. Novel organisational structures are also required to meet this growing demand for single country populations that in effect, are larger than the whole of Europe.

It is anticipated that some of the most valuable healthcare companies in Europe will generate a large proportion of their sales from BRICS economies. In my opinion, key features of success in these economies will include targeting so-called diseases of plenty (obesity, hypertension and diabetes) which are becoming increasingly prevalent as societies are lifted out of poverty. For example, in China 10% of all adults are currently thought to have diabetes. This is up from 5% of all adults in 1980. In absolute terms, this represents a patient population of 110 million, with further growth in this disease expected to result in 150 million patients by 2040. This is likely to result in market demand for new products and services such as targeted therapeutics that are optimised for the genetic make-up of the Chinese population, improved diagnostic tests, and methods of delivering care to in a cost efficient manner across a population sizes that are measured in the billions.

Key challenges for new entrants to the market will be understanding rapidly changing regulatory landscapes, navigating the political risks associated with being a foreign company in economies with varying levels of restrictions, and the challenges of intellectual property protection in jurisdictions where traditionally, it has been difficult to defend a product or service from imitators. However, with the BRICS economies predicted to overtake most of those in Western Europe by the middle of the century, we believe there is a significant chance that the most valuable companies may be those that serve these markets first. We’ve backed exciting companies like Concepta, which is bringing the latest fertility technologies to China and aiming to help millions of couples start a family. These kinds of opportunities in emerging markets show that it’s entirely possible to solve problems and capture value on a greater scale outside of Europe and North America.

The 4th Industrial Revolution

Scarcely a day goes by without a tech blogger talking about the upcoming revolution in “digital health.” Whilst digital health covers a wide variety of innovations, we are particularly interested in computational health as this actually reflects what is happening – computers helping to deliver healthcare. With recent high-profile failures, including IBM Watson being “benched” by prestigious US cancer centre MD Anderson, as reported by Forbes, it’s easy to think that computers in healthcare may be over hyped.

While current technologies may struggle to accommodate for all of the complexities in healthcare, this is often because the data used to train these systems is often incomplete. Considering that Google’s DeepMind system trained itself on 10 million YouTube videos before it learnt to recognise an image of a cat - you can start to sympathise with systems that have access to only thousands of medical records which then try to do something as complex as recognise cancer.

Furthermore, 80% of all medical data is unstructured, sometimes hand written, making it hard for super computer systems to process it. This results in a serious lack of data to train with. If the systems were trained better, the performance would be better, which would lead to significant reductions in the cost of healthcare delivery at almost every point in the value chain and improved patient care - transforming healthcare as we know it. Unfortunately, this seems a distant dream at present, but the 4th industrial revolution will change that.

If we consider that the 1st industrial revolution was the advancement of steam engines in the 18th Century, the 2nd was the growth of electricity, the 3rd was the movement from analogue to digital machines and the 4th is the development of data-driven tools – then these are instruments that gather, analyse and store data on a scale that has previously never been seen before, and it is these machines that will power the computation technologies of the future. Data really is the new oil. Interestingly, electronic medical data (which is perfect for systems like IBM Watson to process) is growing at a rate of 48% per year. Put into context, by 2020, 94% of all medical data available will have been created after 2013. This fresh data is largely electronic and ready to be processed.

The opportunities for new companies to emerge in this space are significant and Mercia is working with many of these organisations already through our managed fund activity. These companies are data-capturing companies that allow us to understand healthcare problems better (sleep-focused portfolio company SleepCogni), image recognition technologies that spot problems in X-rays that clinicians may miss (Manchester Imaging – dental imaging), regulatory technologies that ensure the latest developments stay on the right side of government regulators (new portfolio company Miotify), and even tools that let clinicians understand the needs of their patients better by improving communication and tracking outcomes (Health Centrified). These businesses all solve problems that affect global populations. This isn’t just about value capture – it’s about genuine value creation. And in my opinion, computational technologies in healthcare will change the world of medicine and in doing so will generate immense value.

If you have any thoughts or comments regarding this Insight then please don’t hesitate to get in touch, email: Ashish.patel@merciatech.co.uk

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