Healthcare is one of the world’s largest industries. Globally, the size of the healthcare market can be estimated to be between five trillion to six trillion dollars. Three trillion, or over half of which is spent in the United States, meaning that just 5% of the world’s population accounts for over 50% of the world’s total health bill. To further compound the impact of healthcare on the US economy, it is well known that the US spends anywhere between 16 to 18% of its GDP on healthcare, which is over twice what most developed countries spend.
As one example of how large the healthcare industry actually is globally, consider this: all spending on products and services concerning the heart (pharmaceuticals such as beta-blockers, cardiovascular surgery procedures, etc) is actually larger than the entire automotive industry. Therefore it is no wonder that both entrepreneurs and investors have traditionally looked at healthcare as a lucrative industry to disrupt and invest in.
Entrepreneurs and their investors typically start most assessments of businesses by calculating the Total Addressable Market (TAM) which is simply the total size of the market (in terms of revenue potential) that a new product or service, or in our case, the digital health industry can potentially achieve. So what is the TAM for new health technologies and how does this potential impact the healthcare economy?
Many would argue that the TAM for disruptive healthcare technologies is actually the entire healthcare industry itself. That we will one day wake up to robo-diagnosticians that will prescribe 3D printed pills delivered by automated drones and robo-surgeons that would splice our DNA while uploading nanoparticles through the complex Internet of Things (IoT). Those who are slightly more conservative, might limit high potential health technologies that tackle the 30% administrative cost that currently plagues the healthcare industry making the global TAM for digital health to be roughly around 2 trillion USD. So regardless of which side of the spectrum you lie, it is clear that the disruptive potential for health in the fourth industrial revolution is substantial and that the economic implications of disruptive digital health technologies are vast.
More importantly, the rate of innovation and digitization in healthcare trails in comparison to other industries, which have adopted these disruptive digital technologies at a much more rapid pace. Consider all the banking transactions that you have at your disposable in the palm of your hand, or the thousands of hours of digital simulation training pilots must master prior to their first test flight. Many digital pundits believe that if healthcare had embraced the adoption of all things digital at the same rate of say the banking industry, patients today should be able to perform heart surgery...on themselves.
So where is the digital health industry today in terms of size and funding? Globally, the digital health industry is calculated to be between 55 to 67 billion USD, roughly about 1 to 1.5% of the global healthcare industry and is estimated to be growing at a rate of 20 to 25% annually. A grow rate that is likely to be just as aggressive in the next five years. To capture the growth of this industry, investors have poured in over 5.7 billion USD in 889 digital health companies in 2015 and over 17 billion USD since 2010 in over 3,000 companies. In 2015 there were over 1,000 companies and investors that made an equity investment in at least one digital health company, up more than a 361% from the 234 that invested in digital health in 2010.
The beauty of investing in new health technologies is that it combines the high risk / high reward paradigm synonymous with the tech industry and the stability / defensiveness of the healthcare industry, thereby hedging or mitigating the investor’s risk and providing an ideal counterbalance to future rewards. While many entrepreneurs and investors from Wall Street to Wuxi are singularly driven by maximizing profit, a great number of healthcare and health technology entrepreneurs and investors are driven by the tandem outlook of both financial profitability and improved societal benefits.
So where do the opportunities exits in 2017 and beyond? I have highlighted seven future technology trends and themes that will be impacting the global healthcare industry:
- Financial Innovations for Funding a Sustainable Future Global Healthcare Economy - including Sugar and Tobacco Tariffs, Pay For Performance Metrics and Preventative Healthcare Grants and Reimbursement Mechanisms. A recent study by University of Queensland School of Public Health that showed a simple 20% tax on only sugary drinks in Australia would raise an estimated $400 million a year and reduce annual health expenditure by up to $29 million, with 800 fewer new Type 2 diabetes cases each year once the tax was introduced resulting in at least 1600 fewer deaths would have occurred over 25 years, due to 4,400 fewer people with heart disease at that time and 1,100 fewer people living with the consequences.
- Encouraging Accountability for a More Open and Transparent Healthcare System – this is perhaps one of the most interesting recent global trends in healthcare and it forms the crux of the Affordable Care Act in the United States. The main idea is that healthcare practitioners will no longer profit from the sickness of patients, but instead will be incentivized to keep patients healthy and encourage preventative and evidence-based medicine. This is of course nothing new. In the Fertile Crescent in 17th century BC the Code of Hammurabi called for physicians to be paid only if their patients were healthy.
- Disruption of the Traditional Parental Model of Medicine and the Preference for Patient Consumerism – another interesting global trend in healthcare, which has affected other industries such as travel and tourism, is consumerism or a paradigm shift by which patients are taking increasing ownership of their own healthcare needs. Whether it is ‘shopping’ via the phone or online for the best priced healthcare service, or even as far as self-diagnosing themselves prior to a doctor’s visit by browsing the multitude of online healthcare resources, the traditional paternal model of medicine whereby the physician’s word is the unequivocal law is slowly eroding. In particular, price transparency is an increasingly important global sub-trend since consumers have greater access to pricing information prior to obtaining medical services.
- Rising Burden of Medical Inflation - inflation in the healthcare sector has outpaced the inflation in the CPI by almost 700% over the past 40 years according to the US Bureau of Labor Statistics. Within healthcare the largest cost bucket is typically the remuneration of healthcare workers. Whether it is the salaries of healthcare executives, clinicians or administrative staff, it is costing more and more to staff healthcare facilities and technology has still not been as disruptive in healthcare as in other industries, only around 50% of doctors in the USA use some form of electronic health record (EHR) according to US based Practice Fusion. Another cost barrier is the high administrative costs associated with healthcare. This is estimated to be between 24 to 31% according to research by the New England Journal of Medicine on the United States, which many experts agree is the world’s most bloated healthcare system as healthcare spending is between 16 to 18% of the GDP (the OECD average is closer to 8% of GDP across most of the developed world).
- Treating Biology with Biology: The Importance of Investing in New Personalized and Genomic Medicine Technology such as Clustered Regularly Interspaced Short Palindromic Repeats - CRISPR (pronounced crisper) are segments of prokaryotic DNA containing short repetitions of base sequences. Each repetition is followed by short segments of "spacer DNA" from previous exposures to a bacteriophage virus or plasmid. The CRISPR interference technique has many potential applications, including altering the germ line of humans, animals, and food crops. Most recently, the use of CRISPR for genome editing won approval for a revolutionary trial to fight cancer in humans where scientist from the University of Pennsylvania will edit the immune systems of 18 patients to target cancer cells more effectively. The experiment won approval from the Recombinant DNA Advisory Committee (RAC), a US federal ethics panel set up at the National Institutes of Health to review controversial experiments that change the human genome. A big part of the future of Personalized Medicine is the analysis of big data where tremendous amounts of data are generated and aggregated, which eventually need to be comprehended to access the full predictive power (see chart below).
- Innovations in 3D Printing Technologies as a Future Replacement to Partial and Full Organ transplant, specifically - Continuous Liquid Interface Production (CLIP) – a photochemical process that makes it possible to produce structures with excellent mechanical properties, resolution, and surface finish. CLIP will soon make it possible to print isotropic organs and body parts with mechanical properties and surface finish like injection-molded plastics. No other additive technology delivers the synthesis of fit, form, and function needed to bridge the gap between prototyping and manufacturing.
- Robotic Surgery as a Technological Add on For Telemedicine in Remote and Rural Areas - the future vision is to make minimal access (or keyhole) surgery universally accessible and affordable by significantly expanding the range of procedures that can be performed robotically. Many robotic surgery firms have successfully completed preliminary cadaveric, animal and first-in-human trials. Leveraging robotic surgical technologies to dovetail with traditional telemedicine will transform the existing market for surgical robotics and address the immediate needs of performing high risk surgeries in rural and remote area. Global annual revenues for robot-assisted minimal access surgery are presently approximately $4 billion and are anticipated to reach $20 billion by 2025 according to research by Cambridge Medical Robotics.
Perhaps the best way to summarize this opportunity in investing in future health technologies is that the greatest investors, like the best spouses, always see the potential of the person in front of them rather than their current status. Technical terms such as top line revenue, net present value, P/E multiple and buzz words such as traction, big data, and brighter days ahead, play second fiddle to the all-important truth in investing: you invest in the potential of the future.