Source: Streetwise Staff, The Life Sciences Report (10/11/12)
The myth of technology, whether for smartphones or cancer treatments, is that the next big thing appears suddenly and magically. Casey Research Analyst Alex Daley sets the record straight in this exclusive interview with The Life Sciences Report. While the science of genetic medicine has accelerated the process of turning magical thinking into practical medicine, Daley cautions investors in biotech and medical device companies to be patient, and names companies with innovative technologies poised for explosive growth.
The Life Sciences Report: At Casey Research's "Navigating the Politicized Economy" summit, you talked about the difference between the speed of science and the speed of technology, and how quickly the time to market and cost of products in the life sciences space is decreasing. Can you provide some examples?
Alex Daley: Many technologies, like the touch-screen tablets and smartphones that now dominate the market, seem to come out of nowhere, perpetuating the myth of technology as almost magical. But you only have to look as far as the as-yet-unfulfilled promises of recent years to see the slow development curve that leads to explosive growth. This has been most noticeable in the advent of genetic medicine.
We all remember the sequencing of the human genome as a scientific milestone. Announced in 2000, just at the turn of the millennium, it was followed by much media fanfare about the dawn of genetic medicine. Every untreatable disease was going to be cured. Every person was going to receive medicine tailored to his or her unique makeup.
Yet, more than a decade later, that promise remains almost entirely unfulfilled. It's not that the science has stood still. Quite the opposite: It has been moving forward at blazing speed. The original human genome project, which sequenced a single person's genome to 92%—including everything but some particularly difficult areas—took 13 years and cost more than $3 billion ($3B). It was a monumental advancement, but not practical for everyday use.
Over the last decade the cost of genome sequencing has fallen far faster than many predicted. We've gone from taking 13 years to taking just about one day to sequence a whole genome. And the cost has fallen from billions to thousands of dollars. We've now sequenced tens of thousands of genomes for scientific research, and with the falling price that number is skyrocketing. We have built an amazing scientific base for study, and driven down costs to make it viable for mainstream use. All of that had to happen before genetic medicine could even begin to crawl forward—precisely what is happening now, with the advent of the first U.S. Food and Drug Administration (FDA)-approved antisense drug and other genetic milestones just being reached.
Just as the plasma TV (invented in the 1930s), the LED light (1960s), the industrial robot (also a child of the '60s), the touch-screen interface for computers (early 1980s) and other inventions we think of as thoroughly modern took decades to go from the lab into our everyday lives, it will take considerable time for genetic medicine to fully develop. But the pace is ever-increasing and advances happen at an astounding rate. The decrease in time needed for gene-sequencing, for instance, far outpaced the development of computer chips in terms of cost/speed, as in the famous Moore's law (predicting a doubling of circuit capacity every two years).
TLSR: What is the role of FDA in that race to market? Is it a speed bump, a safety crew or something else?
AD: The FDA exists exactly as a speed bump. Those derisive descriptions of its role are, of course, correct, but also a bit wrong-headed. It's like complaining about a speed bump in front of an elementary school because you want to drive 90 miles per hour on that road. You simply cannot.
Left to our own devices, we humans can accept a lot of collateral damage. Put us into a collective like a corporation (or an army) and the sociopathy is amplified a hundred-fold. It makes a lot of sense for society to erect some reasonable barriers, rooted in scientific proof, at the entry to the market for experimental and potentially dangerous drugs. One only has to look back at the last few decades, replete with horrible tragedies like that of thalidomide, which caused hundreds of babies to be born with horrible birth defects, to see the need for ample study. And the recent results from trials conducted in other countries, now discarded because the numbers were faked, is a reminder that the desire to cut corners continues to this day.
I see the FDA as a necessary evil. As with any bureaucracy established to monitor progress in a civilized society, the balance between usefulness and hindrance tends to take on an ebb and flow. Over the past decade the FDA has become increasingly conservative and lengthened the burden of bringing new drugs to market. That's partially a result of our society's litigiousness. But it is also a reaction to the fact that more categories of drugs, behind which the very science is novel, are in the pipeline than ever before.
I see the FDA listening actively to corporate concerns about efficiency and cost. It has taken a number of steps to make the process clearer, cleaner and faster without sacrificing important hurdles on proving both safety and efficacy. I applaud the FDA for the work it does for us as consumers, and for trying to balance that mandate with the need for a vibrant market filled with innovation. There is a reason America is still, by far, the leading bio/pharma innovator in the world.
TLSR: You also talked about robotics at the Casey conference. Do you like medical devices as an investment because they have faster approval timelines? Are there breakthroughs in the space that could release a flood of new products in the near future?
AD: Medical devices are an excellent place for investment, if you understand the market well. It is a fundamentally different market than the drug development market, and driven heavily by consolidation of late. The leaders of that business are mega-caps, like Medtronic Inc. (MDT:NYSE) with insulin pumps, Stryker Corporation (SYK:NYSE) with pain pumps and other devices, and increasingly Johnson & Johnson (JNJ:NYSE), which has been acquiring heavily in the space. J&J recently purchased Guangzhou Bioseal Biotech Co., for instance, which makes a porcine-based sealant used by surgeons to control bleeding. It also purchased Synthes Inc., which makes implants to aid in bone healing, as well as a number of other devices.
Many have complained that the levy in the "Obamacare" (Patient Protection and Affordable Care Act) legislation package of a royalty tax on the gross proceeds of all medical device sales will hinder innovation. To some extent that is true—all targeted taxes have exactly that effect. But those economists, and the companies involved, see how absolutely huge the opportunity is. With a current global market for medical devices approaching $300B annually, and a projected growth rate that is double the speed of drug development, there is no shortage of investment in this area.
That investment is resulting in major advances in materials, hybrid biomechanical systems and sensors. The latter is one of the most promising areas, with huge advances in wireless, implanted sensors to help monitor chronic conditions. As the prices of such systems fall, multibillion-dollar opportunities open with regard to heart disease, diabetes and other, less common chronic conditions.
From an investment perspective, there is still a gap between the public and private markets for medical devices. You can find a number of small medical device makers, such as NxStage Medical Inc. (NXTM:NASDAQ), with profitable niche markets. But I think that over the next decade investors will find most of the growth in profits from the sector—which, yes, has faster approval times, but also carries much higher costs of distribution, service and support—to be in large caps. In particular, I think medical devices will drive much of the growth at Johnson & Johnson. Smith & Nephew (SNN:NYSE) is also well positioned.
TLSR: Are we at the limit of what small molecules can do? How will development of treatments that take advantage of more complex lipids and proteins change how we treat disease?
AD: There is no limit to what small-molecule drugs—the traditional chemical-industry born pharmaceuticals we are accustomed to—can do. But they are just the tip of the iceberg. We are walking pools of organic substances—amino acids, proteins, lipids, cholesterol etc.—with their large and complex molecules. And that is the next major phase of medicinal development—tapping into our biological systems to cure and prevent disease. There are now more biological compounds in the FDA approval pipeline than traditionally discovered small-molecule drugs. That is just a preview of the shifting balance between small- and large-molecule drugs.
In the first phase of what promises to be a sea change in medicine, we are taking advantage of our bodies' natural systems to aid in the delivery of small-molecule drugs. Our immune systems are incredibly powerful, and have many tools to keep inorganic substances out of our bodies. By wrapping these molecules in proteins or lipids that are familiar to our bodies, we can oftentimes deliver drugs more effectively.
Following that is the introduction of targeted proteins to mimic natural functions. If we can successfully reproduce the proteins put out by our own ribosomes and through other processes, we can modify bodily functions, potentially interfering with, for example, the plaques that build up and cause Alzheimer's disease.
Then genetic medicine follows from that, in which we interfere with the processes of genetics to turn off (or "silence") misbehaving genes, or to turn on dormant ones. For instance, a large branch of regenerative medicine is studying how to temporarily suspend the genetic mechanism that causes mammals to scar instead of regrowing limbs via blastema, as our ancient predecessors once could.
TLSR: A number of companies are looking at creative ways to deliver targeted chemotherapy. What breakthroughs do you see in this area?
AD: There are two very specific breakthroughs here of interest.
The first is the recently approved use of antibody-drug conjugates (ADCs). Seattle Genetics (SGEN:NASDAQ) is the leader in this space, and its ADCs are created by bonding traditional chemo with antibodies selected from our own bodies that target very specific cancer cells. Chemotherapy, which is known as the "poison" in the oncological lingua franca "slash, burn, and poison," does precisely that to the entire body, causing horrific side effects in many patients. By piggybacking on the body's own mechanism for targeted immune response, chemotherapy can be rendered basically inert except when it comes in contact with cancer cells. This means more chemo can be delivered safely, working wonders on metastatic cancers and other difficult-to-target, small, multiple-growth cancers.
On the other side is a much smaller and lesser-known company with an FDA decision pending on a liposome-wrapped chemo that will advance the treatment of large solid tumors in much the same way. It is a much simpler mechanism of action. Celsion Corporation (CLSN:NASDAQ) wraps current market-leading chemos, like Doxorubicin, inside a fat molecule, rendering them much less potent in the bloodstream. Once the chemo is distributed throughout the system, a radio-frequency device is aimed at the area of the tumor, cracking open the delivery vehicles and causing the chemo to attack that local area. It is like combining the best aspects of radiation (targeting) with the best aspects of chemo (effectiveness). The therapy is still pending final review, but we believe, given the data we have seen, that it is very likely to see approval late this year or early next.
TLSR: The first RNA interference (RNAi) antisense treatment, which targets on-off switches in genes—a discovery that won the Nobel Prize in 2006—was approved by the FDA this year. Could this open the floodgates for companies working in this space? Will companies that enter the space later benefit from the trails blazed by the first ones out of the gate?
AD: It'll start with a trickle, more than a flood. But make no mistake: RNAi, or temporary gene silencing through interference with the messenger RNA that signal cell behavior, looks to be one of the most important genetic treatment methodologies yet conceived.
Genetics are at the root of just about every major chronic disease—heart disease, cancer, diabetes. Gene silencing has serious promise with regard to controlling the root causes and predispositions for some of these maladies, instead of waging continuous battles against symptoms, as we do today.
For instance, Kynamro, from Isis Pharmaceuticals Inc. (ISIS:NASDAQ), is the first antisense/RNAi therapy to have a new drug application accepted by the FDA. With Kynamro we have a treatment for one of the most severe heart disease-linked genetic maladies, familial hypercholesterolemia, the name of which should be self-explanatory even if you cannot exactly parse the medical terminology. Kynamro helps block the action of certain genes known to contribute significantly to excess low-density lipoprotein (LDL or "bad" cholesterol) levels in these patients, who previously could do little to temper their predisposition to coronary artery disease.
These kinds of highly targeted genetic treatments may hold keys to silencing the growth factors that make cancer run rampant and uncontrolled, or may control the buildup of the brain plaques I mentioned earlier, which have links to Alzheimer's. They even show promise in being able to silence some of the designed obsolescence symptoms we refer to as aging—a condition fully rooted in our genetics.
However, RNAi is a very young science. The tools that discover the genetic links are advancing rapidly, and we are at the cusp of much larger and more frequent discoveries. Still, much of the genetic machine remains a complete mystery to scientists, and that knowledge gap will slow the creation of gene-silencing therapies.
The companies best positioned in this space have decades of technology in their pipelines, and strong intellectual property to ensure their investors are the ones to benefit most from the slow but steady revolution in this science. While many major drug companies are working in this space, nearly all of them rely on the science and intellectual property (IP) from two firms to make progress (and these two firms have quite rich pipelines of their own): Isis Pharmaceuticals, whose antisense discovery platform is the gold standard; and Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ), whose founding team includes one of those Nobel prize winners you mentioned. Alnylam has the most advanced technology for delivering these drugs, which every discoverer will need to get to market.
TLSR: What about the prospects for pathway inhibitors? Do you see major breakthroughs in 2013? Which companies will get treatments to patients successfully?
AD: This is a much more narrow space than RNAi, but equally exciting because of its potential to change the treatment regimen for certain cancers in the short term. Pathway inhibitors promise to interrupt the signaling pathways that cancer uses to tell itself to grow, effectively stunting the spread of malignancies. Cellular biologists and oncologists have been studying these mechanisms for decades, and have discovered some that are particularly unique to cancer.
A small company named Curis Inc. (CRIS:NASDAQ) holds the most IP in this space and was behind the announcement early this year of FDA approval for Erivedge, an inhibitor focused on the "hedgehog pathway" for treatment of basal cell carcinoma, a previously difficult-to-treat and disfiguring cancer. The company has a rich pipeline of drugs based on the same science in various stages of development. In essence, Erivedge is the tip of a chevron strategy for tackling cancer with this technique, which promises to slow or stop cancer growth, buy critical time for treatment via other means and preserve precious time for patients and their families.
Pathway inhibitors are a perfect example of the continued relevance of small molecules in the biological world. These traditional drugs took a very biotech path to market, but are nonetheless more similar to the drugs of yore in mechanism of action than they are to complex genetic and protein therapies. Not every drug going forward will be a biologic.
TLSR: You called 2012 one of the single most exciting years to be in technology, particularly the $750B drug space. What are your predictions for the life sciences sector in 2013?
AD: 2012 brought many firsts in biotechnology: antibody-drug conjugates widely marketed, antisense drug approval and marketing, a pathway inhibitor widely marketed. There are 20 other such milestones we don't have time to list as well. And the combination of all that excitement has had the effect of floating the entire sector much higher. Average valuations are up. The volatility of progress and setbacks are both amplified considerably. This kind of high-potential, high-energy market brings with it new risks.
One risk is that considerable disappointment and malaise lie ahead, as the inevitable slow creep of technological development sets in—pushing the sector sideways or even down considerably as the impatience of a largely short-term-minded Wall Street weighs on shares. In many cases the discoveries of 2012 were purely scientific. It takes time for science to make its way into marketable technology—and it rarely meets the overexuberant dreams of prognosticators in its capabilities.
As investors, it is critical we remember to invest with realistic goals and timelines. Cut the consensus forecast in half. Then do it again. If the company still looks cheap, maybe then you have a great investment.
In our portfolio, we are concentrating heavily on mature technologies that are on the cusp of the market. It is a dream market for stock pickers in that area right now. With such a rich pipeline of discoveries, we are able to uncover severely undervalued companies with near-term catalysts for share price growth. That is the strategy that will serve biotech investors best for the next few years.
TLSR: Alex, thank you for your time.
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Alex Daley is the senior editor of Casey's Extraordinary Technology. In his varied career, he has worked as a senior research executive, software developer, project manager, senior IT executive, and technology marketer. He is an industry insider of the highest order, having been involved in numerous startups as an advisor to venture capital companies. He is a trusted advisor to the CEOs and strategic planners of some of the world's largest tech companies. And he’s a successful angel investor in his own right, with a long history of spectacular investment successes.
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