Innovation: Which firms profit most from America’s health-care system

I am tracking the vexed issue of “healthcare innovation” as it requires a deeper dive. I am not too inclined to write on the “politics” of American healthcare- there has been enough ink on this. Although, I am surprised that despite the overwhelming PhD thesis on this, what has actually changed!

Nevertheless, assuming that patents represent the “innovation”, the number of healthcare patents is falling. The reasons are not far- the research focus has shifted from the corporate R&D spending to the Universities which is not a healthy mix.

Meanwhile the effectiveness of R&D seems to have fallen. Richard Evans of SSR, a research firm, tracks the number of high-quality patents (defined as those cited in other patent applications) that drug firms generate per dollar of R&D.

This metric has dropped sharply over the past decade. Shareholders may groan, but for the economy overall the system seems to be working. Big pharma is still splurging on R&D but not making out like a bandit.As the drug industry has come back down to earth, the returns of the 46 middlemen on the list have soared. Fifteen years ago they accounted for a fifth of industry profits; now their share is 41%.

Schumpeter – Which firms profit most from America’s health-care system | Business | The Economist

While it maybe fashionable to blame the drug companies as “vultures”, the middling layer seems to corner the profits. Here’s another telling blurb:

Yet perhaps capitalism is not broken and new contenders will eventually be tempted in. Amazon has acquired wholesale pharmacy licences in multiple states. It is also teaming up with JPMorgan Chase and Berkshire Hathaway to create a new health system for their staff. These initiatives are at an early stage, but investors are sufficiently worried that they value the intermediaries on abnormally low multiples of profits, suggesting earnings may fall. People often get upset when conventional industries are hit by digital competition. Few would lament it in the case of health-care middlemen.

I am not sure how that would pan out in the future but it is definitely ripe for disruption. Amazon provides an interesting contrast to entrenched players.