Health insurance unicorn Clover Health has launched a new drug research offshoot

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San Francisco-based health insurance startup Clover Health kicked off a new drug research and development subsidiary, dubbed Clover Therapeutics, through a partnership with Roche-owned biotech company Genetech to design more effective drugs for its Medicare Advantage (MA) members.

Establishing Clover Therapeutics is the insurtech's latest move to zero in on bolstering its services: Clover branched out last year with the launch of in-home care, which included genomic testing. And it hinted at doubling down on a broader health-focused play after it ditched 25% of its workforce in March with plans of bringing on more healthcare talent.

In theory, the potential dividends of bringing drug development in-house could give Clover a much-needed boost:

• Clover could better control drug costs, which are disproportionately high for seniors - the only demographic Clover covers. Because Clover is an MA insurer, its members are predominantly seniors - meaning drug spending on chronically ill members likely eats up a large share of Clover's funds: 80% of seniors suffer from at least one chronic illness, per Healthy Aging. And one-fifth of Medicare spending goes toward prescription drugs, according to the Kaiser Family Foundation. Taking control of the development process could help Clover cut out the middlemen in the pharmacy supply chain that tack on fees and also develop drugs that are tailored to its customers.
• And Clover's current medical expenses - driven in part by drug spending - may not be sustainable.Clover doled out $109 million in medical expenses for its members in Q1 2019, which accounted for about 95% of its premium revenue. For context, the US government penalizes MA payers if they don't spend at least 85%of premium revenue on customers medical claims, but insurers that hold this ratio close to 85% make better margins per member than those with higher expense ratios. A high ratio of claims to revenue isn't out of the norm for Clover: It allotted 95% of premium revenue to medical expenses in 2018, too.
• Commercializing new drugs could also eventually offer Clover inroads into the pharma market.For example, Clover and Genetech are tackling age-related macular degeneration as their first drug development disease area. This is likely because it affects about 15% of seniors, per the NIH. But it's also a potentially lucrative choice: The ophthalmic drug market is projected to reach $40 billion globally by 2026.

But I (Zoë) think Clover's initiative isn't a surefire way to give the startup the immediate relief it needs.Drug development is a long, costly process - and Clover might not have time and money on its side in the short term. On average, it costs almost $3 billion to research and develop a drug, and clinical trials can take up to seven years to complete, Phrma reports.

And these numbers represent established drug companies, not players that are new to the scene. Shoveling cash into new research initiatives that won't breed a return of investment for close to a decade might not be a smart choice for Clover: Though its losses were cushioned in Q1 2019, the startup lost $41 million in 2018, nearly double the $22 million it lost in 2017.

I think Clover might have more health-focused projects up its sleeve that could offer some support while it kicks the drug company into gear. Clover has been active this year in showing it wants to dig deeper into healthcare beyond just insurance. I wouldn't be surprised if the startup launched new health projects that'll provide some short-term financial padding since Clover Therapeutics should shape up to be a costly endeavor.

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