When it comes to forecasting the size of the market for drugs to treat various diseases, the estimates for the same disease can seem to fluctuated wildly depending on the model used and the timeframe of the forecast. However, one thing that is fairly consistent is that for many of the major diseases, these forecasts involve big numbers - billions of dollars. However, as a guide to pharmaceutical earnings, these forecasts are meaningless if health payers cannot afford the costs.
A recent report says that at least 1 in 100 Americans has Hepatitis C (HCV). The HCV market has been estimated to reach $18B by 2017; up from $7B in 2014. RBC Capital Markets forecasts that the Hepatitis B (HBV) market will grow from $2B in 2014 to between $6B and $16B by 2020 (depending on effective new drugs coming on to the market). The market for Human Immunodeficiency Virus (HIV) is forecast to reach $21.8B by 2018. Diseases associated with aging, such as Alzheimer's, are going to trend in the same direction.
Who can afford these massive increases in health costs?
While we ponder on the answer to this question, it is worth noting that these forecasts are made using the current paradigm for drug sales and disease treatment. This is the paradigm where patients get sick and take a course of medication, which may or may not cure them. If they get sick again, the patient starts a new course of treatment.
In the case of HCV, there are some new drugs which are now starting to hit the market that have a high cure rate with few known side-effects. These are being heralded by some as the answer to the need for an improved standard of care for HCV. However, their price is so high that a draft report from the California Technology Assessment Forum states that, twenty years after treatment, the community benefits from these new treatments will only be about two thirds of the cost. Furthermore, a study into HCV patients shows that about 90% of new patients are intravenous drug users, which means that this group has a high risk of re-infection and another round of high medication costs.
I am not saying that patient care should come down to an economic argument but the fact is that someone is going to have to pay the bill. Will that be Medicaid/Medicare or private health insurance companies? Will it be some other health payer?
What if the paradigm was changed? What if the paradigm changed from a pill-popping, repeat prescription model to a treat once, fix forever model? What if the future standards of care for HCV, HBV, HIV, cancer, Alzheimer's and many more ailments was a single shot (or three or four shots at the most)? Would that be the answer to the health payers prayers? Would that bring spiraling health costs back under control? Well, of course, the answer is that it depends on the price of the shots.
Benitec Biopharma (OTCPK:BNIKF) is one company that this trying to change this paradigm along with others such as Bluebird Bio (NASDAQ:BLUE) and uniQure (NASDAQ:QURE). Benitec has a RNA interference technology (ddRNAi) which works to switch off errant genes that produce disease causing proteins. The company is about to trial a treatment for HCV. This treatment (TT-034) is a single shot, which means that patient compliance is not an issue. As ddRNAi works at the DNA level, the liver cells that are modified by the treatment become medication factories which continually produce the anti-HCV treatment for the life of the cell. So, even if a patient gets re-exposed to HCV, the patient's liver cells will remain protected. TT-034 could become the market leader and standard of care for HCV.
Calimmune, a private company, has licensed this technology from Benitec for the treatment of HIV. They already have a clinical trial underway (although the current trial is somewhat more involved than providing a single shot). Their drug, Cal-1, could become the standard of care for HIV.
Gradalis, another private company and yet to become a licensee, is achieving amazing results in cancer clinical trials using a modified version of this technology.
Now, going back to my previous question of: "Who can afford these massive increases in health costs?" The answer is, no one. If this is the case, then surely a paradigm shift in disease standards of care is required?
Companies such as Benitec, which have a health care model that is based more on a vaccine model rather than a pill-popping model, present a real opportunity for governments and health insurance companies to get ahead of the game and change the current paradigm. Through investment in these new paradigm companies health payers could influence the pricing of these new treatments. This would be a win/win situation for both the health payers and companies such as Benitec and uniQure. It would provide the companies with the capital they need to advance their various technologies while shining a light at the end of the health cost tunnel for health payers. However, to date, there has been little commitment to invest in a paradigm change by governments/health payers [Two notable exceptions are the government of California, which has made investments through CIRM (California Institute of Regenerative Medicine) grants, and the UK's Welcome Trust.]
So, who will invest in this new paradigm?
If the health payers were to invest in the new paradigm, the benefit to them would be the opportunity to influence the future cost of providing health care.
Big pharmas are dabbling with investment but have made no serious commitment. Maybe a mid-tier pharma or an up and coming Chinese pharma wanting to get a jump on the likes of Pfizer (NYSE:PFE) and Merck (NYSE:MRK) will take the plunge? Or, maybe big pharma is just waiting for a little more maturity in the technology before making a significant investment?
At the moment there is a real opportunity. Sure the new model means company profits for these new paradigm companies will fall away rapidly as patients become cured but those companies with foresight, such as Benitec, will be able to corner the market in a number of disease areas before moving to the next disease. For those companies that get in first, early market dominance will more than compensate for the forgoing of repeat revenues in later years.
As with anything new there is high risk associated with this investment strategy for both corporate and retail investors but there is also a very significant upside if the new treatments become the standards of care for major disease types. All biotechs suffer from the possible risk of running out of capital before commercialisation occurs and the risk that their technology does not work in humans.
Benitec has taken steps to mitigate these risks. It has recently announced the raising of AU$31.5 million to fund its continuing programs. This is in addition to the AD$5.17 million that the company had in cash reserves at the end of the December quarter and represents a significant de-risking of the company in the short to medium term. A further AU$9 million could be available to the company should options that are currently in the money be exercised by the option holders.
The company has stated that the capital will be used to progress its pipeline of treatments for HCV, HBV, Non-small Cell Lung Cancer (NSCLC) and Age Related Macular Degeneration (NYSE:AMD). It has licensed ddRNAi to other companies for the development of treatments for HIV, Rentitis Pigmentosa, Huntington's Disease and Breast Cancer.
ddRNAi products are yet to be approved for general use and not gaining approval from the FDA is clearly the major risk for investors. The technology has to be proven in large patient groups and to do so will require further investment in more clinical trials. However, ddRNAi drugs have made it into the clinic and the wide spread of main stream diseases that are being researched means that, even if one or more treatments proves to be less efficacious than expected, there are others that can prove the new paradigm is possible.
Many companies have "game changing" technologies, few have "paradigm changing" technologies but Benitec is one of these. Big pharma is unlikely to want to see health payers take control of the market and so when the technology is proven in humans, as results from HCV, cancer and HIV accumulate, the stand-off of big pharma waiting to invest in the company will break; one of them will blink, the question is, which one?
Disclosure: I am long BNIKF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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