The Daily Reckoning UK

Trump Snarls At Biotech

Tom Bulford

by

Posted 31st January 2017

When Hillary Clinton accused the pharmaceutical industry of ‘price gouging’ in a tweet last September she put the skids under share prices in the sector. But relief that she was beaten in the Presidential election has soon turned to alarm at the alternative. Donald Trump’s version is that the industry ‘is getting away with murder.’ As industry leaders gathered for the annual JP Morgan Healthcare Conference in San Francisco this month, the mood was wary…

My intention in this newsletter is not to blindly back biotechnology – of which human healthcare is anyway only a part – but to find very specific investments in the hotter spots of the industry. All the same investor sentiment trickles down from the top and can affect the climate for fund raising at all levels. So we need at least be aware that after a non-stop bull run from 2010 through to mid-2015 the Nasdaq Biotechnology Index ran into 12 months of profit-taking and has since been going sideways. As top Wall Street analyst Jamie Rubin of Goldman Sachs recently pointed out the pharmaceutical sector is seen as defensive, and at a time when investors have been betting on a Trump-inspired revival of US industry it has underperformed.

Don’t expect much from Trumpcare

Right now there is plenty to ponder on both sides of the Atlantic. Over here Theresa May is backing science and said that where the EU and Britain have a mutual interest in co-operation then this should continue. The regulation and approval of new drugs is a prime example, but the outcome of negotiations is anyone’s guess. Over there Trump has wasted no time in ordering an end to Obamacare while, as well as sounding off about drug pricing, he has called for more negotiation in the bulk purchasing of drugs and the return of manufacturing from offshore back to the USA. The industry waits to see whom he will appoint to run the Federal Drugs Administration and how his new health insurance system (‘Trumpcare’ perhaps) will live up to his promise that it will be ‘much less expensive and much better.’

We should not expect too much. Calling for action in the USA’s political system of checks and balances does not necessarily bring it about. There are some obvious contradictions in Trump’s vision, such as the return of manufacturing back to high cost USA at the same time as cutting drug prices. The bigger picture is that an ageing population and chronic diseases apply constant upward pressure to the healthcare budget, of which drugs account for only c.10%.

Nonetheless the industry is vulnerable. Drug prices have been ratcheted up and in many cases are extremely expensive. A recent suggestion to limit increases to ‘no more than 10% per annum’ only strengthens the conviction that pharma executives occupy a parallel universe. Consumers see an industry that is reporting billion dollar profits but is not doing much for them. But as Stanley Crooke, CEO of Ionis Pharmaceuticals, perceptively points out ‘What’s really driving the problem is a decline in productivity, and the fundamental challenge that the industry has not met adequately is to invent new, disruptive technologies that can lead to more efficiency.’

New medicines for minor diseases

And yet it is precisely because of this gloomy background that we are excited about the new techniques of biotechnology. The old method, of throwing chemical compounds against diseases and hoping that something sticks, is being superseded by a far better understanding of the mechanisms of disease and we have an armoury of new weapons with which to fight. A longer perspective is supplied by the Quintiles IMS Institute in its report ‘Outlook for Global Medicines through 2021.’ It forecasts that global spending on medicine will increase by 4%-7% annually as budgetary pressures and cheap generic versions of off-patent drugs are more than offset by the emergence of new medicines targeted at sub-sectors of disease groups. ‘The number of new medicines reaching patients will be historically large… and will address significant unmet needs in cancer, autoimmune diseases (where the immune system either under- or over-reacts), diseases of the metabolism, nervous system and others.’

More than this, ‘developments that go beyond specific “drugs” are emerging.’ These include ‘completely new platforms…in areas such as the gene-editing technology CRISPR, which could transform personalised cancer treatments.’ The report also highlights the potential for harnessing the microbiome (a person’s own gut bacteria) as well as regenerative cell techniques that include ‘stem cells harvested from one part of the body to use against a disease in another.’

Far and away the most promising area is cancer. Inspired by exciting trial results this is dominating research budgets and leading the way towards personalised medicine. ‘The sheer number of cancer treatments, their potential combinations in treatment regimens, and the variety of companies involved in development will bring significant change to the landscape of cancer treatment over the next five years….Dramatic improvements in survival and tolerability are expected.’

This year there will be about 15 million new cases of cancer worldwide and this will rise to 22 million by 2022. But there is more hope than ever before. Cell therapy, which introduces fresh and sometimes genetically engineered cells into the body, is one new approach. Another is to tackle cancer stem cells, to head off cancer before it emerges. But the most advanced treatment is immunotherapy, in particular a new class of drugs called ‘check-point inhibitors’ that allow the T cells of the immune system to hunt down cancer cells. Driven by evidence that new cancer drugs work the market is forecast to grow by 7% per annum to 2020, outpacing the wider drugs market.

It’s hard to pick winners

But which drugs, and which companies, will do best? This is not so easy to predict. It would be nice to be able to say that in ten years time there will be one leading drug for lung cancer, another for prostate cancer, another for breast cancer etc. But we now know that two people’s prostate cancer may be very different and respond to distinct therapies. We also know that one drug alone might not be sufficient.

As well as trying to uncover new drugs the industry is today pursuing multiple strategies. Drugs are not approved simply for ‘cancer’ or even ‘prostate cancer’. They are approved for particular manifestations of cancer. So even if a drug that has been approved for breast cancer it must go through a whole new application process before it might be approved for prostate cancer. Next is the distinction between ‘first-line’ drugs – the first to be given to patients – and ‘second-line’ drugs that can be given if the former have failed.

Another way of getting your drug approved is to demonstrate that it works in sub-sectors of patients, characterised by specific biomarkers such as the genetic signature of the tumour. Finally companies want to demonstrate that two drugs work better than one – so-called combination strategies. In the case of cancer it is entirely possible that a simultaneous attack with chemotherapy drugs and immunotherapy might work better than either in isolation. Hundreds of studies are now underway applying two drugs together – notwithstanding the potential price of prescribing not one but two expensive drugs.

With so much activity and with drugs emerging that supersede existing treatments the picture is constantly changing.

From time to time we may tell you about regulated products issued by Agora Financial UK Ltd. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment.