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Since Dendreon's (DNDN) FDA approval of Provenge, companies have spent billions on research to learn the best methods to harvest the immune system and fight cancer. Clearly, Dendreon took a wrong turn at some point in Provenge's development. Because although effective, Provenge's manufacturing, cost structure, and survival benefit is limited compared to newer therapeutics in development. One of those newer therapeutics is a class called anti-PD-1s, and if the last year is any indication, these anti-PD-1s will be the focal point for the future of treating cancer, both alone and in combination with other therapeutics. Companies that can best capitalize in this space, stand to create billions in annual revenue, and large gains for shareholders.
Creating the Anti-PD-1 Blockbuster
At this last year's ASCO, Bristol-Myers (BMY) and Merck (MRK) stole the show with the development of a new technology called "anti-PD-1s". This involves a process that allows the immune system to recognize tumors by blocking PD-1s. As a result, the immune system can then fight the disease, which is the concept of immunotherapy, by being able to recognize the cancer. In regards to Bristol-Myers and Merck, both presented some of the best data we've seen in treating cancer.
Bristol-Myers' new anti-PD1 candidate, nivolumab, produced very strong results at ASCO in treating melanoma. Overall, in five different doses, nivolumab produced meaningful tumor shrinkage in 31% of patients. Moreover, the overall response rate in patients treated with 3mg was 41%, thus showcasing very strong anti-tumor activity. Bristol-Myers is now testing this dose in a Phase 3 trial and is looking to combine the drug with its blockbuster, Yervoy. Then, most analysts expect further development in combination with other agents to fight different forms of cancer. Hence, investors can identify a pattern where the development of this one approach leads to billions across a variety of cancers.
With Merck, its anti-PD-1 drug, labrolizumab, produced even better results. It saw meaningful tumor shrinkage in 38% of advanced melanoma patients, including 52% in one patient population. This data compares favorably to Bristol's average and best dosage. However, both pieces of data are extraordinary, and investors are excited as both companies begin testing these products on other indications such as lung, breast, and kidney cancers.
Currently, Bristol-Myers is further ahead in the development race of its anti-PD-1, thus meaning that it will gain an edge by launching its product first. However, Merck is not far behind, about a year, so by having a more effective product it begs to reason that Merck could come out the long-term winner with its anti-PD-1 product, used as an individual treatment. However, we do not yet know how each product will test in treating other diseases such as breast or kidney cancers. Merck clearly has the more effective drug for melanoma, but Bristol's drug could be more effective in lung cancer. As a result, analysts have been generous in predicting peak sales estimates, possibly exceeding $5 billion respectively for each product.
More Following Suit with Combination Therapies
Bristol-Myers and Merck made the anti-PD-1 approach famous, and could earn many billions in annual revenue with each respective product. However, this is just the start of the anti-PD-1 story, as companies are finding that the most effective therapeutic, might be to combine the cancer-identifying approach of anti-PD-1 with other cancer killing agents. Thus, attacking the disease from two or more different angles, which might produce even greater clinical results.
Just a couple weeks ago, AstraZeneca (AZN) made news when management discussed a new plan to use combination therapies to fight cancer. AstraZeneca had been criticized over the last year(s), as its pipeline apparently lagged a bit in respect to innovating with the newest technologies. The company's goal is to use anti-PD-1s, but combine it with both small molecule pills and injectable biologics. The idea is to attack the cancer from as many fronts as possible, and AstraZeneca is expected to use candidates such as MEDI4376 and tremelimumab in order to do so.
If successful, this would be a major win for both the company and shareholders. AstraZeneca is a massive company with over $26 billion in revenue during the last 12 months. However, the company's revenue and margins have both fallen with the loss of patent protection for several of its best-selling drugs. Now, the company's aggressive plan to ramp up its development of combination therapies might give it an edge, or lead to additional acquisitions. Either way, shareholders should benefit from this newfound sense of urgency on behalf of management.
Looking throughout the market, it seems as though more companies are preparing to take the results made famous by the likes of Merck and Bristol, but then add a combination twist. Bristol-Myers is testing its nivolumab with Yervoy, a combination that some believe could produce sales over $5 billion annually. Also, by combining nivolumab with Yervoy Bristol-Myers might find that it's more effective than Merck's anti-PD-1, thus Bristol-Myers would have the best treatment. However, Merck's management is not sitting on their hands and hoping for the best. Instead, they too are testing other therapeutics with labrolizumab. Clearly, AstraZeneca has already been working with these combination approaches, but so are a lot of small companies as well.
A Small Company with Big Combinations
One of the most notable small companies that is testing this approach might be Lion Biotechnologies (OTCQB:LBIO) helmed by Dr. Manish Singh. Singh was formerly the CEO of ImmunoCellular Therapeutics (IMUC) and made famous his multiple-antigen targeting approach at a time when immunotherapy was stealing the biotechnology spotlight. ImmunoCellular's ICT-107 has produced the best results ever seen in fighting glioblastoma multiforme, more than doubling overall survival in terms of months, and did so by targeting the cancer from several angles, targeting six different antigens expressed by the disease, versus the targeting of one antigen by other immunotherapies (i.e. Provenge).
Now at Lion, one of Singh's top priorities is to take its product, TILs (tumor-infiltrating lymphocytes), and combine it with anti-PD-1s. Already in a Phase 2 study on patients with the severest and most deadly form of melanoma, TILs produced a 22% complete response, and 19 of the 20 patients who achieved a complete response are still alive 6-9 years later. In a study of 136 patients treated at NCI, MD Anderson and other top institutions, TILs produced a 50% objective response, which is far better than any other FDA approved late-stage melanoma treatment, a second and third line salvage setting where all other treatments had failed.
While the Phase 2 data was very good, Singh now looks to test TILs with anti-PD-1s and other therapeutics such as Zelboraf. According to clinicaltrials.gov, the Phase 1 study for TILs and Zelboraf is actively recruiting patients. Zelboraf is a highly effective treatment for melanoma patients who have a BRAF mutation, but unfortunately, patients often recur within 9 months of treatment. Thus, by combining two different treatment approaches (TILs and Zelboraf) it is possible to keep those patients in a disease free state for longer periods of time. It is this thought process of using different therapeutic approaches that Bristol-Myers, Merck, AstraZeneca, and even small companies such as Lion are attempting to perfect.
In regards to anti-PD-1s and TILs, this could be a highly effective combination. Most tumor types have a small number of T-cells known as Tumor Infiltrating Lymphocytes or "TILs". These TILs fight the disease but are not strong enough alone because it's insufficient in quantity and because of T-Cell suppression by the tumor via PD-1 pathways. Hence, Lion already solved the first problem by making TILs more potent and increasing the number from a few million to several billion cells before injecting into the patient, which has worked well in clinical trials. But, with anti-PD-1s, TILs might work even better as the immune system better recognizes the disease. As I previously stated, the same concept applies to all companies that are trying to use anti-PD-1s with other therapeutics, essentially attacking the disease from several angles.
At $3.55 Lion has a market cap of just $65 million. While there are risks associated with such a small company, Singh recently completed a private financing that gave the company net proceeds of $21.6 million. Thus giving Lion more than two years worth of operating cash. Also, the company's data is robust, having treated 136 patients at four well respected sites. In fact, such data is far superior to what we've seen among competing companies in treating cancer, those that have higher market caps, including Singh's previous company ImmunoCellular Therapeutics with just 16 patients. While there are no guarantees that Singh's company can replicate its clinical data in an even larger study, investors have to like the combined effect of a larger number of strong T-cells and anti-PD-1s, both of which have shown consistent response rates in the 30%-50% range.
Click here for my detailed assessment of Lion's Phase 2 data
Where is the Investment Upside?
If we look through biotechnology as a focus, it really is remarkable to identify which areas or stocks are gaining the most momentum with investors. Of those known as battleground stocks, or momentum stocks, we can identify Alexion Pharmaceuticals, BioMarin, Regeneron, Celgene, Gilead, Biogen, Valeant, Pharmacyclics, and Vertex. These are the companies that have performed the best over a course of years and have become most popular in the healthcare space, in some ways replacing conventional names such as Bristol-Myers, Pfizer, Merck, or Eli Lilly.
However, investors should consider the diseases being treated by these noted companies. Alexion and BioMarin are both orphan companies. Regeneron's biggest programs lie in treating diseases of the eye, asthma, and cholesterol. Gilead is known for its HIV and hepatitis product-line. Biogen is known for its multiple sclerosis pipeline; Valeant is an acquisitive company with good growth in several industries; and Vertex has rallied in response to its HCV and cystic fibrosis platform. Therefore, all of these companies have a niche, and only Celgene and Pharmacyclics are known for significant product innovations in the treatment of cancer.
While some may view the lack of development on behalf of biotech's elite as a bad sign for oncology, this fact might be good for big pharma. Companies such as Merck, Bristol-Myers, Roche, AstraZeneca and then smaller companies such as Lion, have an opportunity to control a space that is much larger than anything being developed by the industry's elite. Thus, when I say a paradigm shift, we are not only seeing survival increase from months to years, but also in the way the market views companies developing such therapeutics. In the past, with very little progress and innovation being made, there was no reason to get too excited about new therapeutics. Today, there is real reason to be excited, and this could lead to a shift in which companies the market rewards with large valuation premiums, those such as Merck and possibly Lion at some point in the future.