AI in Healthcare: Navigating the Future of Medicine and Investment Opportunities
Worldwide, hospitals, clinics, and practitioners are overwhelmed and, in some cases, unable to care for their patients. However, with the rapid growth of the Machine Learning (ML) industry, large language models (LLMs), such as Alphabet’s Med-PaLM2, and augmented reality (AR)-based technology, the road ahead for healthcare appears less gloomy.
So, where precisely is the healthcare industry succumbing to pressure? The cost and time that comes with bringing new medicines into the market is immense. Currently, drug manufacturing can cost as much as 1 billion dollars, and drugs can stay in development for 14 years. These commitments, however, are often fruitless - meager success rate in drug development (97% of cancer drugs fail during clinical trials, between 2002 and 2012, 99.6% of Alzheimer-targeting drugs failed, and a success rate for all drugs and vaccines between 2000-2015 being c.13.8%).
So where can AI' swoop in’? Firstly, De novo molecular design developments may lead to a cheaper and faster drug development process. Although it is not brand new, it is a sophisticated machine learning-based approach that, with across-the-board implementation, could be game-changing. Aside from expediting the drug creation process, machine learning models are far more efficient than humans with data analysis, labeling, and modeling, helping physicians make the correct diagnoses and prognoses for their patients (In the US, 6%, or 7.4 million, of the 130 million patients receive incorrect diagnoses, with the WHO stating misdiagnosing is a severe global health issue). AI has already demonstrated a remarkable ability to match or even surpass human experts in interpreting medical images, including detecting pneumonia from radiological scans.
Similarly, the assimilation of AR into operating and nursing rooms could help patients, especially children, better understand their condition, says Dr. Harvey Castro, GPT advisor and Physician. He also states that ‘android’ nurses could help make up for the declining and aging nursing population while simultaneously elevating nursing standards (although I’m not sure how I would feel if Siri told me my spleen had been ruptured).
As we can tell, the implications of a large-scale introduction of AI into the medical world could be groundbreaking. Not only will it be able to improve the lives of millions of patients, but it will also enhance the efficiency of resource distribution, forecast regions of high demand, and extend telemedicine services to communities with limited access.
In the investment world, the AI healthcare space is undoubtedly one to keep an eye on. The following are green flags that we believe may be indicators of a market teeming with growth opportunities.
1. AI-driven imaging & solution startups have raised $50 billion in financing as of 2023..
2. The global generative AI market in healthcare boasted a size of $1.3 billion in 2022. It is projected to grow at a compound annual growth rate of 37% between now and 2030.
3. Crucially, relevant recent developments, including Apple’s Vision Pro AR goggles, OpenAI’s GPT-4, and Alphabets’ Gemini language models, are signals of a broader and potentially inter-industry focus on artificial intelligence.
4. Government backing and subsidizing: The Chinese government has placed a large focus on AI, subsidizing healthcare startups, and fostering private-public partnerships in the sector through investments. The British government recently announced a £21 million fund to integrate AI across the NHS as well as an additional £100 million investment into the AI Life Sciences Accelerator Mission. The Chips and Science Act puts $39 billion in subsidies in place for US-based chip manufacturers in the US.
So, who are these tech-savvy pioneers, and are their businesses and financials rendering them worthy of potential investment?
Stryker (SYK) – Aside from manufacturing an array of medical equipment and hardware, Stryker has committed itself to being a pioneer in the AI healthcare space. Through its developments of the ‘I Suite’ and Scopis ENT software, AI-powered platforms capable of enhanced image analysis, Stryker will revolutionize surgeries.
Its financials are robust, with revenues and net income consistently increasing year-on-year since 2020 (during 2023, net sales increased by 11.8%, and earnings increased by 32.4% to $5.8B and $3.2B, respectively). Additionally, their strong cash flows and healthy balance sheets position Stryker well to continue their investments and to drive forward with their growth.
Alphabet (GOOG) – The company's ability to leverage its extensive data, advanced AI algorithms, and technological infrastructure gives it a competitive edge. Med-PaLM2 and AMIE (Articulate Medical Intelligence Explorer) are two recent developments made by Alphabet that could be instrumental in elevating patient care.
On the financial side, there really aren’t any major red flags. An operating income of 84.293 billion and more than sufficient short and long-term assets to cover their respective liabilities are indicative that Alphabet has more than enough to cover its obligations while maintaining enough capital in R&D. Looking at Alphabet's return on invested capital (ROIC), we see that since 2019, it has consistently kept its ROIC between 30-33%, well above its competitors. With the latter in mind, we should put faith in whichever AI developments Alphabet gets involved in.
Equinix (EQIX) – Although not directly associated with healthcare, data center Real Estate Investment Trusts (REITs), such as Equinix, will more than likely benefit from the increased computing and data storing demands that will come with the growth of the AI industry. Equinix is already capitalizing on this opportunity and has recently announced that it will fully commit to managing and servicing Nvidia’s AI supercomputing. Nvidia, a company that might as well be the golden child of the AI market due to its unstoppable growth, will likely inspire other companies to look to Equinix for their services, too.
As a REIT, investors can capitalize on its growth potential, its dividend yield (Equinix predicts that its dividend per share will increase by 10% over the coming years), as well as its innate obligation to give investors 90% of its taxable income via dividends. This dual exposure could offer a balanced mix of income through dividends and growth potential tied to the expanding use of AI technologies and the corresponding demand for data center services.
Hologic Inc (HOLX) – Hologic Inc has recently made fantastic strides in the integration of deep machine learning AI algorithms with volumetric imaging technology. They call it the Genius digital diagnostics system built around the Genius Cervical AI Algorithm. Putting the jargon aside, it is essentially a system that has been programmed to be an early detection system against cancerous cells and lesions. It could be game-changing for women’s health, and laboratories around the world, such as those in Australia and Europe, are recognizing its potential and demanding its integration into their healthcare infrastructure. In the US, it has received FDA approval, marking it as the first and only available FDA-cleared digital cytology system.
Financially, year-on-year revenues, gross margins, and EPS declined, most likely due to a decrease in COVID-19-related services. Despite this, earnings estimates have been revised, and Zacks has rated it at #2 (buy), indicating growing momentum behind the investment. Hologic also seems very confident in its growth; in Q4 2023, Hologic bought back 3.2 million shares for $230 million.
