[U23] Containergeddon: is there a bigger story?
Container ships off the coast of southern California are a visible proxy for supply chain challenges now and in the future across many industries
Dear Reader,
Southern California is reporting a record backlog of container ships waiting for available space to dock and unload cargo. The situation is being reported in many ports around the world. Ports are intervening by increasing more 24x7 operations, but capacity is already only about 70% due to labor shortages. And downstream logistics to transport containers and warehouse goods are also contributing to the problem. It seems consumers have been busy buying goods in a marketplace that has been significantly impacted by the pandemic.
In this update, we will explore the bigger story around what is happening to supply chains across all industries that are maybe less visible. And what is the impact on the economy and access to critical supplies and services. Ride sharing services from Uber and Lyft are not reliable for an early morning flight that requires a 5:30am pickup or returning to the airport late at night. Go to the ride sharing pick-up area at Logan Airport in Boston around midnight. All the people waiting for a ride look like the container ships stacking up off the coast of Southern California.
Key semiconductor lead times to source chip components in Asia are running 40 weeks or more in quantifies of 1,000s of units through the supply chain. Small orders of 100s of units can be found, but at a significant markup in price. It seems chip hoarding is going on in the semiconductor supply chain anticipating higher prices later. The only way to really bypass this constraint is to provide an order large enough to deal directly with the manufacturer. This requires significant capital or coordination between customers to aggregate demand. This is likely going to resolve over the next 12 months and supplies will free up when there is fear in the supply chain prices are going to fall.
Labor shortages are impacting other supply chains and even basic services like waitstaff in restaurants, medical assistants in healthcare and essential front-line workers in manufacturing and logistics. The likely outcome of all these supply chain and labor challenges will be increasing costs for the required solutions. Those higher input costs will drive up the price for goods and services. Inflation is already taking hold for produce in the grocery store, hotel rooms, natural gas and many other goods and services.
Vehicles in production waiting for certain semiconductor chips are stacking up like those containerships off the coast of southern California.
In some cases, disruptive innovation can provide alternatives to bypass supply chain issues. If goods and services can be replaced with a digital alternative that is one example. But in other cases, the disruptive innovation can introduce new challenges to supply chains. One example is with transportation and energy. The automotive industry has been challenged with chip shortages to manufacture and sell new vehicles. Production is being shutdown for weeks and months by some vehicle manufacturers. Vehicles in production waiting for certain semiconductor chips are stacking up like those containerships off the coast of southern California.
If a consumer owns a reliable vehicle with an internal combustion engine, gasoline may increase in price with supply issues trying to meet demand in the coming weeks, but gasoline is still readily available and more is coming through a robust and mature supply chain. When Tesla introduced the Model S in 2012, they were only selling several thousand vehicles per quarter. The lithium battery supply chain could easily support Tesla’s needs. However, Tesla will produce close to 2 million electric vehicles in 2022 with the addition of vehicle manufacturing at Giga Berlin and Giga Texas factories later this year. Tesla has stated their own production will ramp to 20 million vehicles per year by 2030. And now most major vehicle manufacturers are planning to either fully convert or significantly increase production over the next 5-10 years to battery electric vehicles.
Tesla approaches problems as a vertically integrated manufacturer. Tesla is sourcing raw materials from mines to scale manufacturing in-house for their own nickel cathode lithium ion batteries needed for high energy density applications. Tesla is using third party battery cell manufacturers to supply lithium iron phosphate batteries for more standard applications. But the traditional car companies are looking at battery electric vehicles as new models that require design changes. They have likely not fully analyzed the supply chain and secured batteries and raw materials to meet their demand for vehicle production over a sustained period of time.
It takes 6-8 years to bring new nickel mine production up to scale. The battery supply chain will be able to supply Tesla for both vehicle and energy systems under long term contracts. Tesla has stated they will buy as many batteries as the suppliers can produce. The competition for raw materials will be tight for GM, Ford, Toyota, Honda, Hyundai, VW, Daimler, BMW, etc. to all pivot and scale battery electric vehicle production. It is survival and it looks like many will fail.
Primary Care as a constrained Supply Chain
Where supply chain challenges are less visible includes critical areas like healthcare where the pandemic has strained providers and staff due to long hours over many months responding to patient needs. Emergency rooms and ICUs were at capacity or overflowing for months and in some areas these conditions still exist with outbreaks in cases. Burn-out among providers and staffs is common. And this just compounds the challenge in the US where primary care is at much lower capacity to the demand relative to specialty care. So the picture of the containerships waiting off the coast of southern California can also represent patients waiting to see or not taking action to see a primary care provider to address chronic conditions like obesity, diabetes, mental health and hypertension.
These challenges with primary care also impact their own supply chains. Pharmaceutical companies de-prioritize developing new drugs for primary care because of the scale required to service a market with 250,000 primary care physicians in the US, increasing constraints meeting with primary care physicians using a salesforce and the challenges scaling access to patients through primary care. But these same providers can use their iPhone to purchase almost anything on Amazon in a few minutes with delivery in 2 days if they are an Amazon Prime member. They can listen to almost any music with the Spotify app on the same iPhone while completing patient notes. Amazon and Spotify both figured out how to access primary care providers, but as consumers. Moving bits happens at the speed of light, but moving molecules can take days.
Groceries are a good example of evolving supply chains. Amazon Fresh allows you to order groceries just like any product. Amazon uses different warehouses for standard goods and groceries due to the perishable nature of fresh produce and the requirement for refrigeration for some produce. But with an order, groceries are delivered just like any other e-commerce transaction. Amazon innovated a supply chain to deliver a superior customer experience for delivered groceries. Walmart and Target have also innovated unique supply chain solutions for purchasing goods, groceries and fresh food on the same visit to 1 location.
Apple and Google have scaled up substantial teams, products and services to address the needs of healthcare. Apple CEO Tim Cook has commented that in the future Apple will be remembered in the future for their contributions to healthcare and less about the iPhone. But Apple and Google have recently scaled back these Healthcare initiatives to review and reprioritize due to a number of challenges. Wearables are well within these tech companies core competencies and provide value to many consumers. It’s when they expand services to providers, they often run into challenges with adoption and integration with other legacy healthcare solutions. These large tech companies have not had to evolve a supply chain to include groceries like Amazon and Walmart.
Walmart is somewhat unique with many services that are similar to Amazon, but Walmart has a much larger footprint of physical locations around the US that are frequented by many people on a regular basis. Walmart Health is an initiative to add primary healthcare to the scope of services available at a Walmart location. The scope of services vary from site to site, but can include medical, dental, eye care and hearing services. Walmart staffs these sites with medical professionals, including physicians, nurse practitioners, dentists, behavioral health providers, audiologists and optometrists depending on the services provided at the site.
As these Health services are utilized and the number of sites scale next to Walmart stores, access to primary care could improve dramatically for many people. CVS offers health services with their Minute Clinics inside a portion of their drug stores. Over time as more companies add Health services adjacent to their core business locations, Retail Clinics will play a growing role for many Americans to access primary healthcare. Corporate medical officers and their teams will standardize the services, technologies and care provided through their Retail Clinic network. They can also use their scale to acquire staff.
Retail Clinics also offer a channel for virtual care platforms to add primary and speciality care for chronic disorders. This does provide challenges around how care is delivered. Not all care can be provided virtually, but once a patient has a diagnosis and is on treatment plan, then virtual care can enable more routine visits to happen virtually. Epic can be integrated across Retails Clinics and through a virtual care platform to streamline HIPAA-compliant communication between providers and patients plus access to medical records.
As primary care continues to scale through Retail Clinics and Health Systems adopt systems to scale care this way, the number of covered lives can open up many opportunities to further innovate solutions. I will share more on this in the future, but 3 emerging areas will play an increasing role to advance health in the future.
These emerging area are:
Digital Health
Digital Medicine
Digital Therapeutics
Digital Health is already readily available to consumers, but best practices could be shared through Retail Clinic workshops and information portals. Consumers can buy wearables like an Apple or FitBit watch to monitor exercise and steps with accompanying apps. The Calm app helps consumers relax, meditate and fall asleep. These 3 areas also overlap. The Apple Watch 6 introduced additional sensor capability to record a single channel electrocardiogram (ECG) as a feature of a consumer product. Apple also conducted large clinical studies using early versions of this Watch with the ECG feature to detect atrial fibrillation with an app.
The clinical studies and data allowed Apple to submit a de novo application to the FDA for ECG software as a medical device for over the counter use to identify cardiac arrhythmias. The device is not intended to provide a diagnosis. The original intended use for what the FDA cleared was the detection of atrial fibrillation from normal sinus rhythm. Apple has received clearance for some expanded claims detecting atrial fibrillation with high heart rate. Detecting other arrhythmias and sleep apnea with the pulse oximetry feature are likely on the horizon. But the concept is to detect a risk vs. make a diagnosis under the care of a health care provider that may need additional capabilities.
Remote Monitoring has evolved into Digital Medicine that combines medical “measurement” with something like a Dexcom wearable continuous glucose monitoring (CGM) sensor and mobile app to inform patient behavior around diet, exercise and sleep based on blood sugar readings and medical “intervention” with administration of insulin based on a prescription. These systems will continue to advance and just integrate a layer of regulated medical devices and digital services to extend care by a healthcare provider. Digital Medicine will also expand with wider use of virtual care to expand more services without the need for a clinic visit to run a test that could be handled remotely with digital medicine or visiting nurse.
Prescribed Digital Therapeutics are a new, but growing area to advance care. The vision is to leverage readily available technology from the consumer electronics market like wearables, smart devices, mobile apps and artificial intelligence. Then add the rigor of the medical device industry with design control, quality systems, regulation and clinical trials to validate outcomes similar to developing a drug.
Early adoption leverages unique advantages of technology to improve evidence-based care like cognitive behavioral therapy (CBT) provided by a limited supply of trained clinical psychologists and materials like a booklet outlining a CBT program for insomnia, weight loss or smoking cessation. Sleep Healthy Using the Internet (SHUTi) is an online CBT program developed for insomnia at the University of Virginia. Multiple randomized control trials have validated SHUTi’s effectiveness.
Pear Therapeutics acquired the license to SHUTi in 2019, rebranded SHUTi as Somryst and filed a 510(k) with the FDA for clearance to market Somryst as a digital therapeutic for patients 22 years or older diagnosed with chronic insomnia and under the care of a health care provider. The FDA-cleared Somryst as the first prescribed digital therapeutic for insomnia. Somryst is now available for prescription by providers, but due to the pandemic, Pear established a virtual option for prescription by a licensed provider.
Widespread use of Digital Therapeutics will require both adoption by a large number of providers, coverage by health plans and medical insurance companies and deep integration into the supply chain and provider infrastructure. This requires integration with Epic, inclusion in practice parameters, guidelines and formularies just like a drug and NIH-funded trials to further expand the clinical evidence supporting their clinical use compared to alternatives. Combination therapies are also possible where a digital therapeutic can work when indicated with pharmacotherapy to improve outcomes.
This is the future of medicine for a number of conditions. Just like Spotify accesses primary care physicians to market podcasts and music by subscription when pharmaceutical companies are lining up like containerships to do the same to market drugs, patients with insomnia can now access an evidence-based 6-week prescribed treatment program without leaving home.
But too much Netflix without leaving home may also be contributing to the insomnia! I highly recommend leaving the house to watch the Boston Red Sox play the Houston Astros in the ALCS at Fenway Park. Game on!
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research. I’m long AMZN, SPOT, GOOG and TSLA mentioned in this update. The Boston Red Sox have little to do with containerships off the coast of southern California, but it is October and they are in the playoffs.