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Sustainable healthcare, healthy returns

Thematic equities
12 May 2021
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    Key takeaways

    • Cost is the principal sustainability challenge facing the global healthcare sector
    • Rising expenses for governments and individuals make care inaccessible to millions
    • Change needed to address affordability creates opportunities for investors
    • Proactive stock selection and engagement can help drive healthcare solutions and generate returns

    Once the pandemic fades, tough fiscal choices await. There will be pressure to rein in government spending, of which healthcare is a major part. It accounts for one fifth of expenditure in G7 countries – a figure that continues to grow, as it does globally. Budget constraints are forcing treatment access restrictions, denying some patients therapies required to treat their disease. Furthermore, high out-of-pocket payments drive medical debt that contributes to more than 60 per cent of US personal bankruptcies. This is not sustainable. Thankfully, alternative approaches are emerging through new treatment options, technologies and business models. These can ultimately make healthcare more affordable – helping consumers, governments and society. The innovation and scale required is an opportunity for companies and investors alike.

    Global government health expenditure per capita

    Global government health expenditure per capita 

    Source: World Bank/World Health Organization Global Health Expenditure database
    This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

    Sustainability in healthcare

    While ESG considerations offer one way to evaluate sustainability, with regard to healthcare they do not fully capture the underlying issues and their investment implications.

    Cost is the principal sustainability challenge facing the healthcare sector. As medical costs continue to grow, a basic social need becomes increasingly inaccessible to much of the population. Over 40 per cent of US patients, for instance, missed a treatment dose last year due to cost or other factors1. This issue will only be exacerbated by heavy debt burdens facing governments in the aftermath of the Covid-19 pandemic.

    Debt to GDP ratios have risen rapidly

    Debt to GDP ratios have risen rapidly

    Source: IMF, HSBC Global Asset Management, November 2020 Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.

    As we emerge from the pandemic there will be pressure to rein in government spending, of which healthcare plays an outsized role. Healthcare accounts for one fifth of government expenditure in G7 countries2, with its share up to one quarter in the US after doubling over the last three decades3. Lack of ability to absorb further cost growth creates unappealing consequences.

    Expensive treatments in particular, no matter how innovative from a medical perspective, can become inaccessible in the absence of sufficient state support. This occurs through prohibitive out-of-pocket costs, and no reimbursement whatsoever for some high-priced therapies. Patients in the UK, for example, do not have access to a third of new treatments due to being deemed not cost-effective by the responsible government body. Health outcomes are negatively impacted, as are industry and investor returns.

    The scope of change needed to stop the cycle of spiralling costs and deliver sustainable healthcare systems creates investment opportunities. Proactive investing can contribute to the necessary change while at the same time generating sustainable returns. Importantly, while ESG considerations offer one way to evaluate sustainability, with regard to healthcare they do not fully capture the underlying issues and their investment implications. Expert knowledge and industry experience is required.

    Rising costs for governments and individuals

    The collision of ballooning health- care costs and strained budgets makes hard choices for policy makers.

    Health spending consistently outpaces GDP growth across lower and higher income countries alike. In the US, which accounts for nearly half of global healthcare expenditure, total spend is projected to increase by over 50 per cent in the next eight years alone5.

    Health spending outpaces GDP growth across markets

    Health spending outpaces GDP growth across markets

    Source: World Health Organization Report – Global Spending on Health: A World in Transition, 2019

    The collision of ballooning healthcare costs and strained budgets makes hard choices for policy makers. Governments must decide what therapies they can afford to subsidise. Insurers, as the healthcare payers, are left to determine treatment access restrictions in order to protect their profitability. Barred treatments and high out-of-pocket costs leave patients unable to benefit from the latest scientific breakthroughs. Over 40 per cent of American patients, for instance, are unable to obtain enough of the relevant therapy required to treat their disease6.

    Out-of-pocket costs are rising for individuals even as governments foot more of the bill

    Out-of-pocket costs are rising for individuals even as governments foot more of the bill

    Source: World Bank/World Health Organization Global Health Expenditure database

    Higher out-of-pocket costs exacerbate the wealth divide, leaving patients without considerable savings to incur large debts or go without care.

    Higher out-of-pocket costs exacerbate the wealth divide, leaving patients without considerable savings to incur large debts or go without care. For example, one fifth of Italians do not have access to medical care, with eight million patients spending their entire savings on medical expenses7. In Australia, less than half of cancer drugs approved by the FDA and EMA are reimbursed8. And in the US, over 40 per cent of new cancer patients are forced to spend their life savings on treatments, with survivors and their families left with massive debt9. The combination of high medical bills with time out of work contribute to two thirds of US personal bankruptcies10.

    Meanwhile in developing countries where governments have less ability to subsidise healthcare, even more of the cost burden falls on individuals. Lower incomes mean patients frequently go without treatment due to lack of means to pay. Across low-income countries, average health spending was only $40 a person in 2018, compared with $3,300 in high income countries – a difference of 80 times11.

    Out-of-pocket costs as percentage of healthcare spend is much higher in lower income countries

    Out-of-pocket costs as percentage of healthcare spend is much higher in lower
income countries

    Source: World Bank/World Health Organization Global Health Expenditure database. Data as of 2018.
    Least developed countries as classified by the UN.

    Solutions require new ways of thinking

    Addressing healthcare expenses more holistically opens the door to significant efficiencies and cost reductions.

    In order to alter this trajectory of unsustainable cost growth that leaves healthcare inaccessible, tomorrow’s leading healthcare companies will need to deliver solutions that improve patient outcomes without adding costs. A simple example that gained traction in past years was the shift to generic prescription drugs. They now account for about 80 per cent of the global market for medicines, with an even higher penetration of 90 per cent in the US12

    Proportion of branded versus generic drug prescriptions dispensed in the United States

    Proportion of branded versus generic drug prescriptions dispensed in the United States

    Source: Statista, 2021

    Yet in spite of wide scale adoption, generic drugs haven’t made a notable dent in tackling healthcare affordability and hence on their own do not create a sustainable healthcare system. Someone still has to do the initial research to achieve the scientific breakthroughs that create the medicines that are eventually replicated by generics. To drive that innovation, it must be rewarded. More holistic solutions are needed.

    Per the following chart, healthcare costs are spread across various components of a system. While a patient’s treatment will span multiple components, these costs are typically managed independently. Addressing these expenses more holistically opens the door to significant efficiencies and cost reductions.

    Division of healthcare costs (OECD Average, 2017)

    Division of healthcare costs (OECD Average, 2017)

    Source: OECD Health Data, 2019

    With nearly 75 per cent of total healthcare costs spent on patient care, solutions that can reduce time in care are critically important.

    Alzheimer’s provides an example of why a holistic approach is essential. If a new, breakthrough treatment was ever brought to market, currently there are no existing treatments to displace and drive cost reductions from. However, the costs for Alzheimer’s patients and their families across the healthcare system are massive, and could quite easily offset the cost of a reasonably priced treatment.

    Pharmaceutical companies that actively identify and target wider cost savings, or cost-offsets, as part of their research and development processes, will create larger opportunities for the treatments they bring to market. Most importantly, this would help avoid the cycle of perpetual additive costs. With nearly 75 per cent of total healthcare costs spent on patient care, solutions that can reduce time in care are critically important.

    This can be achieved not only through new treatments that better manage or even cure chronic ailments, but also through diagnostic tools that allow for earlier identification of diseases for more effective treatment, as well as devices and digital health services that more efficiently deliver care. Firms that can deliver these objectives stand to grow revenues and market share.

    Companies able to reduce costs for payers will improve their ability to protect and grow margins.

    Furthermore, companies able to reduce costs for payers will improve their ability to protect and grow margins. Not only will they be afforded greater pricing autonomy, but by avoiding access restrictions they will expand the market potential of their products, driving scale and profitability. To illustrate, Roche’s haemophilia A treatment Hemlibra® (emicizumab) costs almost $500,000 annually per patient. Yet sales are exceeding forecasts because the treatment is clinically effective and helps cut overall costs of treatment by half in the US, for example13.

    There are other examples, particularly amidst smaller biotech companies, which are currently a primary source of the innovation in therapeutics being brought to market. Innovation is also emerging across healthcare delivery, via new diagnostic, digital health and medical device solutions that have the ability to reduce costs across the system and improve patient care access.

    Investment implications

    With clear return opportunities and a need for risk mitigation, investors stand to benefit from a proactive approach.

    To address the issue of healthcare affordability, the old pharmaceutical model of charging higher prices for therapies based on added clinical benefits alone must become obsolete. An unaffordable treatment with high profit margins does not translate to sales growth and generates considerably less value for patients and the company, after all.

    Companies that continue to deliver treatments that add costs to the entire healthcare system will be hit hardest by tighter budgets, seeing reimbursements denied, or access substantially limited, ultimately hurting sales and profitability. While this is a known risk today, many pharmaceutical companies continue to operate R&D models that only incorporate late stage accessibility considerations. Likewise, industry analysts largely simplify the risk of market access restrictions in their valuation models.

    The resulting profitability projections are unlikely to be achieved, due to much smaller patient pools than originally envisioned. This is not only hurting patients by denying access, but will also impact long term company performance and returns for investors. Incorporating these considerations into the investment decision making process provides a more robust understanding of future profitability and the sustainability of business models. Better insights pave the way for superior returns.

    With clear return opportunities and a need for risk mitigation, investors stand to benefit from a proactive approach to security selection and company engagement. While one might assume standard ESG scoring would differentiate between healthcare companies contributing more or less to the unsustainable cost strain, per the table below, this is not often the case. Some companies with ‘good’ ESG scores are the worst offenders in raising drug prices unjustifiably.

    Better ESG ratings do not equate to healthcare sustainability

      ESG Score Drug Incremental cost impact ($m)
    Amgen 5.99 Enbrel® 403
    J&J 5.05 Invega Sustenna/Trinza® $403
    BMS 4.64 Orencia® $145
    Biogen 5.69 Tecfidera® $118
    AbbVie 5.44 Humira® $66

    Source: Institute for Clinical and Economic Review (Unsupported Price Increase Report, 2020 Assessment)
    For illustrative purposes only and does not constitute any investment recommendation in the above mentioned companies.

    In addition to the opportunity to improve returns, investors are in a position to reward companies driving more sustainable business models and behaviour, and challenge those which aren’t.

    Hence, industry-specific analysis and understanding is needed to truly ascertain company impacts on healthcare sustainability. These impacts extend beyond the ability of therapies to treat illnesses at a lower price tag. New technologies are increasing opportunities to deliver care more effectively and efficiently. Emerging diagnostic tools are able to identify illnesses at earlier stages, allowing for more effective treatment options that reduce hospital admissions and time in care. Likewise, medical devices are playing a growing role in delivering both preventative and ongoing care more efficiently. Digital health services are also becoming more prominent due to their ability to provide operational efficiencies while expanding access to care. The ongoing pandemic has helped accelerate acceptance of these services.

    A holistic approach to therapies, supported by new tools and technology, can help transition healthcare systems to a more sustainable footing. Investors have a key role to play. In addition to the opportunity to improve returns, they are in a position to reward companies driving more sustainable business models and behaviour, and challenge those which aren’t. As we have seen with the issue of climate change over recent years, increased focus can shift the way of thinking. In the case of sustainable healthcare, there is no time to lose.

    1Covermymeds patient and provider survey, 2020
    2World Health Organization Global Health Expenditure Database
    3Brookings/The Hamilton Project - A Dozen Facts about the Economics of the U.S. Healthcare System - March 2020
    4IQVIA 2020: EFPIA Patient W.A.I.T. indicator 2019 Survey
    5Bloomberg, Centers for Medicare and Medicaid Services, 2021
    6Covermymeds patient and provider survey, 2020
    7 Center for economic and social rights 2018: Death by a million cuts
    8Journal of Managed care and specialty pharmacy 2017: comparing the approval and coverage decisions of new oncology drugs in the US and other select countries
    9The American Journal of Medicine, June 2018
    10 American Journal of Public Health, February 2019
    11 World Health Organisation Report – Global spending on health: Weathering the storm, 2020
    12US Food and Drug Administration, 2021
    13 ICER 2018: Emicizumab for Haemophilia A with inhibitors: Effectiveness and value
    For illustrative purposes only and does not constitute any investment recommendation in the above mentioned companies.

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