As if sentiment around Smid-cap biotechs wasn’t bad enough, Q1 provided a painful reminder of the high failure rate in biotech. The slew of disappointing results at ASH in December 2015 (which I discussed here) was followed by numerous clinical failures and regulatory setbacks. Most notable blowups came from Celldex (CLDX), Incyte (INCY), Alkermes (ALKS), Oncomed (OMED), Chimerix (CMRX), Atara (ATRA), PTC (PTCT) and Portola (PTLA).
The common theme for most failures was the inability to corroborate an early efficacy signal (pre-clinical or clinical) in a large randomized clinical study. Although there are indications where a clear proof of concept can be achieved in small single-arm trials (especially in mutation-driven tumors), generating positive data in randomized trials is still the primary bottleneck for most companies. Interestingly, the list above includes good companies backed by high quality science and credible management but unfortunately this wasn’t enough.
New catalysts urgently needed
The sobering experience to date makes me even less optimistic about the remainder of 2016. The primary problem I see is the lack meaningful value creating events similar to those which took place in 2013-2015. Back then, PD-1 antibodies, HCV drugs, CARs, certain subsets of gene therapy were able to capture the imagination of investors, creating more than $100B in forecasted annual sales. Although these big ideas certainly delivered in the form of clinical data, they are not enough to support the sector going forward. In some cases, their commercial potential is priced in. In others, clinical benefit was not as phenomenal as expected.
With PD-1 antibodies, there are now multiple positive P3 readouts in melanoma, renal, lung and head and neck cancer (data expected next month at AACR) but the clinical effect is not as dramatic as investors had hoped and patients are rarely cured (with the exception of melanoma). The recently published P3 results for Keytruda in non-small cell lung cancer (NSCLC) demonstrated that while the drug leads to a more than doubling of overall survival (17.3 vs. 8.2 months) in high PD-L1 expressors, this subset represents only ~30% of patients. The remaining 70% derive limited to no benefit.
The quest to find additional immuno-oncology (IO) agents with a similar activity profile to that of PD-1 antibodies has also been fruitless to date. All the new immuno-oncology agents (LAG-3, IDO, KIR, CD27, B7H3, CSF1R, 41BB) have limited to no single agent activity. This led companies to pursue them combination studies that could generate data this year but in most cases there is no control arm. One can only hope that the next wave of immuno-oncology drugs will be more successful as monotherapy. Personally I have high hopes for OX40 agonists (Roche, AstraZeneca, Pfizer) and TIGIT antibodies (Roche).
Biosimilars at the gate
2016 will also be remembered as the year in which the first biosimilar version of a true blockbuster hit the US market. Celltrion and its partner Pfizer (PFE) are expected to receive FDA approval for Inflectra, a Remicade biosimilar, following an overwhelmingly positive recommendation from an FDA advisory panel. The panel recommendation set an important precedent by recommending the biosimilar for all indications for which Remicade is approved, obviating the need for running a pivotal study per indication.
Inflectra is the first of many biosimilars that are expected to launch by 2020, covering products that generate $60B in annual sales. Biosimilars may have a huge impact on the industry, especially on companies with high exposure to biologics (Merck, Abbvie, Amgen, Biogen and Roche). The table below from Nature Reviews Drug Discovery illustrates the massive amount of resources the biosimilar segment is attracting. Beyond the high number of programs, it is important to note that the players involved are much more than the classic generic players, including some with massive global marketing infrastructure.
Source: Nat Rev Drug Discov. 2016 Jan;15(1):13-4.
In an environment where pricing is becoming a crucial factor, having multiple players fighting for market share in a slowly growing segment must eventually lead to steep discounts. This is in contrast to the norm to date of consistent annual price hikes for branded biologics. Switching patients currently treated with a branded biologic is not going to be trivial, but studies like the ones Celltrion published are likely to improve reimbursers’ negotiation leverage.
IPOs unlikely to be the answer
Recent biotech IPOs include some attractive technologies but they are unlikely to generate meaningful results in 2016. The largest transaction was for Editas (EDIT), one of the leaders in gene editing. Gene editing is probably the most exciting scientific innovation in recent years but it will take 2-3 years to generate clinical proof of concept. In addition, it is hard to justify a market cap of $1.1B for a company that didn’t even start toxicology studies for its lead program, let alone clinical trials that are expected to begin towards late 2017. Other IPOs like AveXis (AVXS), Syndax (SNDX) and Proteostasis (PTI) are also not likely to generate ground breaking data.
On the next post I will discuss potential catalysts that could impact the overall sentiment during the second half of 2016.
Portfolio holdings – March 27th, 2016