By: Neel Kulkarni August 28th, 2016
While Wall Street finds itself contemplating rate hikes and politics in late summer, investors should be content. The S&P 500 has already delivered over 6%, earnings are set to rise, and the global economy isn’t collapsing with Brexit.
Of course, an argument could also be made the other way: stocks are expensive, a rate hike could have all sorts of international consequences, and the bond market is in a massive bubble.
In the end, fundamentally strong businesses and long term trends aren’t going anywhere. As the world becomes more integrated, more educated and richer on average, the increasing emphasis on banking, consumption, and infrastructure will persist. One other field that’s likely to make waves? Healthcare!
A recent injury provided a fascinating exposé on the healthcare industry – a vital component of our lives, but which usually is an afterthought for the common individual. After all, when you’re sick or need medical attention, it’s all encompassing, but if all is well, a simple stroll past a local hospital or doctor arouses little emotion or thought, compared to, say, consumer goods or technology. When you go to the doctor, the implicit feeling remains that you’re in the hands of an expert who knows all, and as a result, you are mitigating your health risk as best as possible. Is that the best approach, though, to tackle health? Money or happiness didn’t make the cut on Maslow’s hierarchy of basic needs…what did? Food, warmth and rest – all aspects of survival, which can be distilled down to the simple concept of staying healthy. Over the decades, the medical field achieved significant milestones: the introduction of anesthesia, penicillin, x-rays and transplants all changed the ballgame. Could the current generation of entrepreneurs and scientists take it to the next level? I think yes: technological capabilities, data and medicine find themselves at a fascinating intersection today, which could totally transform human capability. Sure, that sounds optimistic, but if capital finds a way (which it will), anything is possible. Here’s my take on where we can go with this subject:
Let’s begin with the basics. Healthcare is an industry seemingly fraught with hidden detail – what happens at insurance firms, behind hospital walls and inside devices remains at the bottom of the common person’s priority list until – say, one gets detected with a condition or disease – after which the discovery begins. What’s more important than life, after all? The US healthcare industry is gigantic – at $2.8 trillion in size; globally, the field has a roughly 5% annual growth rate (Deloitte data), varying significantly by region. So, the size and employment impact is significant.
Next, we’ve got 7.1 billion people on Earth. 55 million die each year; the World Health Organization estimates non-communicable diseases are responsible for nearly 68% of them, up from 60% back in 2000. That makes sense, given science advancement, vaccinations, and education have mitigated most epidemic issues with time. Alongside, once can’t argue against the fact that life expectancy in the US in 1930 was around 50; today, it’s nearly 80, and better in quality than your great-grandfather may have found.
Back to the size. Per CDC data, the total hospital outpatient visits in the US last year totaled around 125 million. The number of physician visits? 928 million. The total percent of adults who contacted a healthcare professional in the US? A whopping 84%. So, if it wasn’t obvious, we can pretty much say that this industry’s total market size is basically every human…and the data being generated in aggregate is tremendous.
Given the gigantic size, however, I find it curious that technological integration into the market remains relatively small: the global healthcare IT market was valued at only $41 billion in 2013; the healthcare cloud computing market, meanwhile, is worth just $5 billion today. Granted, estimates show expectations of 20%+ in growth rates – but it’s still minor compared to other industries. Electronic data remains another black box. Imagine a visit to the doctor. Upon arrival, patients are required to fill a whole stack of forms involving rights, allergies, and personal information…and for each new doctor visit, they’ve got to rinse and repeat the same information. Surely, there could be a more efficient way: a Jason Bourne-like chip or online health record which could just extract your information from a database – maybe as simple your smartphone? What if someone checked a wrong allergy box on the paper because they were in too much pain? We already have an issue, so isn’t paper just increasing the risks?
Then comes the diagnosis. You explain the symptoms, and the doctor prescribes next steps. Let’s take the example of an x-ray; one of the most routine, common procedures. Some Google scouring reveals that roughly 70-100 million chest x-rays are taken each year in the United States; over 750 million originate in the dental sector. The doctor looks at yours, and makes a conclusion.
Let’s take a pause here. One could argue that the doctor – or more importantly, the patient – is making a decision based on a single data point (an x-ray), from a single opinion (the doctor). Surely the concept of crowdsourcing could be incorporated, especially if such massive data sets are already available? Imagine if your x-ray gets beamed into the cloud. An artificial intelligence system combs through millions of other fibula fractures, finds a relatable, statistically significant number which are precisely similar, and analyzes previously recorded outcomes: 99% of the time, this specific fracture required surgery, and 95% of the time, the patient recovered fully, and within 3 months. It could also outline the complexity, failure rate, recurrence potential, and relate it with the age, weather, and all sorts of myriad factors that would take months for a single person to crack.
Essentially, my point remains that no matter how smart an individual doctor, the combination of large data sets with that same human mind could provide far superior results. The facts back this up: a recent Carnegie Mellon study highlighted in The Economist outlined that doctors were able to predict heart attacks with a 30% accuracy; for the same attacks, a machine-learning algorithm had an 80% accuracy, with 4 hours of advance notice. A Stanford study highlighted by Vinod Khosla showed that two highly skilled pathologists assessing the same genetics slide agreed only 60% of the time. In a world where six-sigma errors are getting challenged on the manufacturing floor, the medical industry – while certainly more complex, could surely push the boundaries ahead. The leading causes of death in the US are heart disease and cancer. That may not be news, but one may find the third cause to be surprising: medical error, as highlighted by studies from NPR – we lose nearly 250,000 patients because of it each year in the US alone. The leading sub-cause? Misdiagnosis.
The numbers bring us to the intersection of Silicon Valley, Wall Street, and information. The concept of combating aging and defying death was unlikely to be a casual discussion in previous decades; today, it is. With more and more eyes on this fascinating subject, investors should be optimistic about the opportunities. Here’s why the numbers above may seem totally astounding to future generations looking back on why their ancestors died:
First, data. The generation of data is straightforward, but the aggregation and analysis is critical. 3 years ago, a Microsoft (MSFT) executive detailed that the usage of electronic medical records was incredibly low simply because doctors generally didn’t find them useful. However, the subject has changed since – prescribing systems, lab information, clinical systems and records have all caused the software-as-a-service component to start getting heavily incorporated into the field. Athena Health (ATHN) remains at the forefront of this; others include CareCloud Corporation and ClearData Networks; IBM’s (IBM) acquisition of Merge Healthcare showed that the big players are turning their head here too. Washington has actually pushed for a transition to all electronic records, and per Forbes, spending on IT per physician is up over 40% from 2010 – it’s still at barely $35,000 per physician, but one can surmise that if diagnosis becomes quicker, it only helps turnover and as a result should continue to increase, helping market efficiency overall. With the advent of fitness trackers, smartphones, chips-in-shoes, etc. the non-medical data generation is also bound to explode, and the combination could prove all sorts of links between exercise, diet, sleep, and health conditions. The fun part? This may be just beginning. PwC estimates that nearly $1 trillion of the existing market is at threat due to new entrants; this includes diagnostics, record keeping, and data generation; given the current size, at $41 billion, technology spending is still a fraction of the entire healthcare market. I believe the growth rate and cost-saving potential for companies is being heavily underestimated at the moment.
Then, of course, come the technologies that could change the game completely. Editas Medicine (EDIT) focuses on gene editing, while Illumina (ILMN) deals with gene sequencing. The costs are negligible compared to a decade or so ago; as results begin entering clinical use rather than just research, the entire concept of reacting to defects or conditions could be a thing of the past. What if hereditary links and consequent changes could iron out the problems before they cause issues? Sure, we’re looking at a whole host of moral and ethical discussions ahead, but the concept is not far-fetched anymore; DNA sequencing originated in 1992, for example, but is commonplace today, only 24 years in. Regarding cost justification, a USA Today article quoted a federal study stating that 5% of Americans accounted for nearly half of all healthcare costs; more targeted data and treatment would have tremendous scale effects.
Investors are taking note. Theranos came and went, but the excitement around the concept of microfluidics remains very real. ZocDoc, despite looking like a straightforward scheduling service, explained that previous to its existence, 10-20% of appointments used to be made and canceled a day before the actual date; the inefficiency was obvious (especially consider the many minutes on the phone wasted in making them). That’s quickly getting eliminated; service, as a result, is getting smoother and removing barriers. Fortune recently reported that Apple (AAPL) was working on a healthcare device that could monitor all our vitals. Peter Theil is backing Stemcentrx, a startup attempting to kill cancer cells (he also wants to live forever), and Google (GOOG) has a DeepMind medical division, alongside backing over 14 life science companies, per Recode. There are too many other examples to list, but essentially, we are looking at an overall quantification of health, where data and objectivity could remove biases and mistakes, and allow experts to focus with the aid of machines and intelligence. The Economist stated last week that curing cancer would only add about 5-7 years to life expectancy averages – the frontier, however, lies in how to get to decades more – and that’s what these firms will end up targeting in aggregate. With data sets, artificial intelligence, the focus of new-age entrepreneurs who want to live longer, and the increasing interaction of technology in our daily lives, the time is right for this quest. Imagine if your ring – a lifeless rock or band – could actually track your blood pressure and heart rate; your contact lenses could provide any info to you immediately, and your belt could track your weight or body mass index. Static data points could be replaced by dynamic ones; you wouldn’t be misled because you took your blood pressure after eating a salty lunch. The opportunities are tremendous.
What it means for you: Such a quantification of health has huge potential. Wall Street, as usual, is stepping up to be the catalyst to channel capital to life – literally, in this case. The reception by asset managers, both public and private, to the numerous companies leading technology into healthcare has been largely positive and long term in nature; investors should absolutely consider exposure to such technologies after research. Sure, new entrants will face significant competition from larger players, cash burn will be plenty, and the hurdles will include intellectual property challenges and regulatory changes. However, it would be wise to bet on a longer, healthier, and happier future ahead, given life will absolutely prevail.
