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Fixing the broken healthcare investment model

A new mega trend in healthcare investment is gathering force, as rising demand and stretched budgets render established pharma models unsustainable.
01 November 2021

    The biotech model that worked so well for decades is all but played out. Innovative therapies that opened up new treatment horizons drove prices, and profits, higher. But, as they search for their next billion dollar products in promising growth areas such as speciality care – notably cancer and rare diseases – pharma companies must first answer a question: who will pay?

    As pressure grows on healthcare systems from ageing and increasingly infirm populations, healthcare costs are already reaching nosebleed levels, rising from around 10 per cent of GDP a decade ago to 18 per cent in the USA1 and 14 per cent in Europe today. Payers and governments are accordingly querying and rejecting costly therapies resulting from recent R&D, or setting limits to how much they’ll pay for them, no matter how technologically advanced they might be.

    “The old model of high innovation and the highest possible price tag is broken,” says Dr Nathalie Flury, co-head at the Global Equity Sustainable Healthcare Fund. “You have to find solutions with payers to come up with the optimal possible price; you have to price therapies in a way that makes sense at a health economic level.”

    Unsustainable prices

    The experience of Bluebird Bio, which pulled its $1.8m per treatment rare disease therapy from European markets after failing to find buyers, serves as one recent, salutary lesson for life science companies and investors alike2.

    Drastic price drops of almost two thirds of cholesterol-lowering PCSK9 inhibitors by such as Amgen and Sanofi in a bid to find a market in the US are another example, says Dr Michael Schröter, who is Flury’s Global Equity Sustainable Healthcare Fund co-head. “There’s not much talk about these drugs now.”

    Other brand-new drugs surely cannot be sustained at current prices, such as the controversially approved new Alzheimers drug Aduhelm, at $56,000 per patient, a price which some estimates suggest could cost US Medicare $29bn a year. “Ten per cent of people over 65 are affected by Alzheimers in the US and would be eligible,” says Schröter. “A report by the Kaiser Family Foundation estimates that even if only one quarter of patients who currently use Alzheimers drugs were to take Aduhelm, it would mean Medicare would have close to double its Part B drug budget because of a single drug. It’s impossible.”

    Comparable calculations apply across the Atlantic. “Everyone knows about rising healthcare costs, but people are much less aware of the consequences – especially so in Europe, where treatment is often provided by governments and citizens – and may not see what’s not being provided.”

    French payers and the UK’s National Institute For Health and Care Excellence (NICE), for example, are declining to reimburse for several of the latest cancer therapies on cost grounds. Yet investors seem not to have woken up to the magnitude of this trend. “The pressure on health systems to change is something that has not sunk in yet; it is mainly hidden,” says Schröter.

    Focusing on value

    With healthcare budgets strained as never before, owing to even greater pressure arising from the pandemic, continued drug price escalation is even less viable. Investors would do well to take note of this mega trend. Focusing on clinical innovation and the theoretical market size for the resulting drugs is not enough. There’s a need to innovate on affordability, too, says Schröter. Companies seeking to simply maximise price and profit will not prosper in this new era if they do not address value.

    This is the new imperative in healthcare, says Schröter, and one that he worked around while at Roche, where he was charged with tackling this very challenge as Head of Personalised Reimbursement Models. “We realised that just bringing therapies to market at maximum prices won’t work, yet you have to recover your investment. That was the impetus for me. This is an opportunity for investors to think ahead of where the industry is running.”

    To pursue this opportunity, Schröter left Roche to team up with his old friend from university, then portfolio manager for Pictet Asset Management’s health fund, Dr Flury, to pursue this theme – and Viopas, a new boutique investment company, was born. The duo worked to develop proprietary tools and insights to help identify sustainable innovation from across a broad swath of the healthcare business, which taps into these new drivers in healthcare. They then joined HSBC Global Asset Management to head its newly launched fund.

    The evidence is already clear, says Schröter. “We are seeing that companies with the right value proposition don’t face access restrictions, and their revenues go through the roof. It is a new environment. The sector is being turned upside down.”

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