As COVID-19 and technological advancement accelerate a rapid shift toward Digital Health, a new class of healthcare technology companies are set to disrupt traditional models, paving the way for sizeable market opportunities. The RBC Capital Markets’ Global Research Team provides its key findings in the latest addition to our Imagine 2025 research series: “Digital Health—Hitting Fast Forward,” published November 12, 2020.
The healthcare industry has been stubbornly resistant to large-scale technological disruption. But now, it appears that the elements necessary to advance a shift to Digital Health are finally falling into place.
Innovations in Big Data and AI, coupled with a healthcare environment increasingly digitalized by the COVID-19 pandemic, are driving this acceleration. Also, the healthcare sector can no longer resist pressure from Big Tech and well-funded start-ups, focusing on patient-centric models that will force traditional healthcare models to evolve.
We don’t expect the complex healthcare ecosystem to be completely upended. But by 2025, we believe the convergence of tech and healthcare will create a $92B market opportunity for tech companies in areas such as AI-enabled R&D platforms, digital therapeutics, and diagnostics and disease management.
Here are the key takeaways from our report:
Emerging models are changing traditional healthcare
Our current healthcare system may best be described as heavily siloed and inefficient.
The major players in Digital Health—including large pharma, Big Tech, AI, and data—all contribute to developing drugs, treating diseases, and delivering healthcare. Patients—who are now the main drivers of healthcare decisions—sit at the center of this ecosystem and are surrounded by the traditional components, namely payers, providers, and pharmacies.
Emerging patient-centric models are now creating “cracks” in this façade, creating ample opportunities for Big Tech and start-ups to help address inefficiencies and patient outcomes.
New ways to improve efficiencies and reduce spend on chronic care
CMS expects U.S. healthcare spending to top $4T this year, and more than 5% growth per year through 2028, outpacing GDP. This growth creates ample opportunities for companies to improve efficiencies and reduce spend in areas such as chronic care management. For example, 60%+ of U.S. adults have at least one chronic condition and spending for these ailments adds up to ~$2.5T per year.
But, healthcare is incredibly fragmented across the continuum of care. For instance, drug prices comprise 9% of total healthcare spending at ~$335B with a 10-year CAGR of 3.4%, which is notably below the overall growth of healthcare.
Annual US healthcare spend as a % of GDP (left) versus breakdown of 2019 US national healthcare expenditures by function (right)
Near-term opportunities for Big Tech may reach $92B in 2025
We believe the convergence of tech and healthcare will create ample opportunities in:
- R&D/drug development
- Digital medicine, including therapeutics (DTx) and other digital interventions
- Devices, diagnostics, and disease management
- Delivery of care efforts focused on improving access to and quality of care and the overall efficiency of payers and providers.
These four areas collectively comprise a $27B market that we expect to grow at a 28% CAGR to $92B in 2025.
A clear road to digitalization, with a few possible hurdles
We believe growing capital, record private investment, and pandemic-led changes in patient behavior may help healthcare digitalization finally take root.
But, we also recognize that there’s always room for potential “surprises” that can either accelerate or disrupt this evolution, such as a prolonged or unpredictable course for the pandemic, Big Tech acquisitions of traditional healthcare companies, or the expansion of existing workplace healthcare ecosystems.
The Global Research Team authored “Imagine 2025: Digital Health--Hitting Fast Forward,” published on November 12, 2020. For more information about the full report, please contact your RBC sales representative
Our RBC Capital Markets Equity Research Contributors
Randall Stanicky
Managing Director, Equity Analyst, Specialty and Generic Pharmaceuticals Research
Randall brings more than 20 years of experience to his role as lead analyst of RBC Capital Markets' Large cap, Specialty and Generic pharmaceuticals research team in New York with coverage of over 20 stocks. Randall joined our firm in 2013 following his tenure at Goldman Sachs and Canaccord Genuity, where he provided coverage of the same sector. He has been ranked in the top three in the Institutional Investor Poll the last four years including No. 2 the last two years in Specialty Pharmaceuticals. Prior to becoming a sell-side analyst, Randall followed healthcare stocks on the buy side at Citigroup Global Asset Management. Randall received a bachelor's degree in commerce from the University of British Columbia and he is a CFA charterholder. He is a former Board member of TherapeuticsMD (TXMD) and currently sits on the Board of Directors at the Children's Tumor Foundation. Randall is a Managing Director of RBC Capital Markets.
Sean Dodge, CFA
Healthcare Equity Analyst,
RBC Capital Markets, LLC
Sean Dodge joined RBC in September 2019 as a senior analyst covering the Healthcare IT/Digital Health and Healthcare Services sectors. Prior to RBC, he spent nearly 10 years covering those spaces at Jefferies and the four years before that at SunTrust Robinson Humphrey covering the consumer sector. He holds an MBA from Vanderbilt University’s Owen Graduate School of Management and a BS in Finance from the Honors College at Oakland University. Sean was awarded his CFA Charter in 2008.
Mark Mahaney
Managing Director, Internet Research Analyst
RBC Capital Markets, LLC
Mark Mahaney is a Managing Director covering the Internet sector research at RBC Capital Markets. He has been ranked No. 1 in the Institutional Investor Poll for the Internet sector (2008-2012). He has also been ranked No. 1 in the Greenwich Institutional Investor Poll for the Internet sector, as well as the No. 1 earnings estimator and the No. 1 stock picker in the Internet retail segment by the Financial Times and StarMine. Mark has been covering Internet stocks since 1998. Prior to joining our research team, he worked on both the sell side and the buy side, including with American Technology Research, Morgan Stanley, and Citibank. Mark holds an MBA from Wharton Business School, an MA from Johns Hopkins' School of Advanced International Studies, and a BA from Amherst College. Prior to Wall Street, Mark worked in management consulting with Deloitte Touche Tohmatsu and with the US Department of State, the US Senate, and the Office of the US Trade Representative.
Alex Zukin
Managing Director, Software Equity Research Analyst
RBC Capital Markets, LLC
Alex Zukin joined RBC Capital Markets in August 2019, and is covering the Software industry. Previously he worked at Piper Jaffray, where he was Managing Director & Technology Group Head, Senior Equity Analyst for Infrastructure & Application Software. Prior to that, Alex was a Managing Director & Senior Equity Analyst for Enterprise Software at Stephens & Co, where he started the Enterprise Software research effort.
Robert Muller
Equity Research Analyst - Enterprise Hardware
RBC Capital Markets, LLC
Rob joined RBC in 2013 and covers the Enterprise Hardware sector. He began his career at RBC directly out of business school, having previously worked in commercial credit analysis and financial planning. Rob holds an MBA from Cornell University and a BA from Boston College with majors in Finance and Mathematics. He is a CFA charterholder.
