Surviving Austerity - 24 September 2010
Alan Le Maistre, Assistant Investment Manager, European Equity Fund
It is estimated that almost half of the $292bn spent on prescription drugs in the US in 2008 went to medications that didn’t help patients. A potential tectonic shift is taking place in medicine and as a result, global governments seeking greater efficiency through austerity measures may benefit from massive cost cutting and efficiency gains within their healthcare systems.
Since the downgrade of Greek and Portuguese Sovereign debt in April, financial markets have been fixated on concerns over elevated government deficits and debt levels. Whilst some major economies like the United States continue to suffer from the conflicting burden of a need to prolong or increase government stimulus measures, the overwhelming reality is that with government balance sheets in their current condition, the need for austerity will influence governmental policy for the foreseeable future. Companies benefiting from increased government efficiency and austerity measures can offer attractive long-term returns driven by a structural trend with good visibility and longevity. Whilst austerity will undoubtedly affect the broad spectrum of public sectors, it is within the health care sector, that a parallel shift at the heart of medical doctrine offers one of the most significant and compelling investment opportunities – Personalised Medicine.
Traditional medicine has focused on blockbuster treatments, drugs which are developed to produce the highest success rate when prescribed throughout the entire population. This largely ignored the genetic variability of population subgroups and the different reactions and susceptibilities of these genetic subgroups to disease and treatment. For this reason, under traditional medical practice, drugs may be issued unintentionally to those individuals who are simply unable to benefit from them or, worse still, to patients who will have negative reactions to the treatment, leading to huge inefficiencies in healthcare systems. This is most profound in cancer and Alzheimer’s drugs where the percentage of the patient population for which a particular drug is ineffective is on average greater than 70%. Each year c.2.2 million Americans suffer side effects and 100,000 patients die from prescribed drugs, costing companies like MEDCO and CUS $4 billion a year.
Whilst good clinicians have always tailored treatments to maximize effectiveness, reduce side effects and alleviate symptoms, generally their arsenal was limited to trial and error prescriptions based on a patient’s personal and family medical histories (allergies etc). In personalised medicine, a profile of a patient’s genetic variation is taken and medical treatments are tailored to the individual characteristics of each patient. This does not literally mean the creation of drugs or medical devices that are unique to a patient but rather the ability to classify individuals into subpopulations that differ in their susceptibility to a particular disease or their response to a specific treatment. Genetic screening can also identify the susceptibility of patients to known future genetically related illnesses. Preventative or therapeutic interventions can then be concentrated on those who will benefit, sparing expense and side effects for those that will not. A working example is Herceptin, a drug which effectively treats breast cancer but only in those 30% of patients with a specific HER2 condition. By running a genetic test before administering treatment, the number of patients being ineffectually treated is reduced from 87% to 12.5%, allowing them to pursue other treatments in a more timely manner and reducing the costs and side effects of mistreatment.
Whilst regional and ethnical variations in human genetics have been recognised for some time and can be quite dramatic, for example distinctive adaptations to dietary differences (e.g. the ability to digest milk sugar) and disease susceptibility (e.g. resistance to malaria), the medical implications of such variations are limited. Simply identifying phenotypic variation such as race was a crude and blunt tool overlooking the underlying biomedical pathways and genetic associations with disease. It was only following the completion of the human genome project in 2003 and parallel advances in genetic technology that the true economic and medical benefits of associating medical treatment with a patient’s genetic profile became a reality. Personalised Medicine developed and the subsequent shrinking costs and technological advances in DNA sequencing have catalysed its acceleration.
The cost of healthcare in Western economies such as the United States is on an unsustainable upward climb. The adoption of Personalised Medicine would help reduce inefficiencies in healthcare services such as trial and error dosing, reactive treatment and late diagnosis as well as reducing hospital admissions associated with adverse drug reactions, which currently account for 5.3% of all admissions. We can now point to specific examples of personalised medicines generating tangible economic benefits. For example, a recent study into the potential cost savings achievable from genetic testing showed that the use of a genetic test to accurately dose the blood thinner Warfarin could prevent 85,000 serious bleeding events, 17,000 strokes and 43,000 emergency room visits annually in the United States alone. If the two million Americans who began taking Warfarin each year were genetically tested at a cost of $125 to $500 per patient, the overall cost savings to the healthcare system would be $1.1billion annually.
Importantly, support from the regulatory authorities is also growing. Today, the FDA requires genetic testing for six drugs and recommends testing before prescribing for more than two dozen medicines. It further mentions diagnostic tests in the labels of more than 150 others.
The success of any form of personalised medicine is essentially dependent on accurate diagnosis, as it is the specificity and reliability of diagnostic tests which limits the degree to which a treatment can be personalised. As such, huge demand exists for new diagnostic products which currently form an industry capacity bottleneck. These products offer pharmaceutical companies the optimal solution to overcoming the current problems of weak pipelines, massive generics threats for existing blockbusters and pricing pressure from worldwide healthcare systems. As the benefits of personalised medicines become apparent, both to manufacturers, governments and consumers, the number of such drugs on the market will grow. For example, the proportion of personalised drugs in the pipeline for oncology-related indications is expected to rise from 15% in 2001 to 70% this year.
Investment opportunities lie in the companies involved in the development of biomarkers used to measure and identify variation, companies such as Abcam and Morphosys, as well as the companies developing diagnostic tests (molecular diagnostics in particular), such as Qiagen and Roche. We are at a monumental junction in the history of medicine and cancer’s “penicillin moment” is offering desperate governments a prescription to greater efficiency.
“It is far more important to know what person the disease has than what disease the person has”
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