Can JAK Inhibitors Challenge Biologics?

When the word "biotechnology" gets thrown around in the pharmaceutical industry, it often implies the biomanufacturing of biologic drugs, such as therapeutic proteins. It makes sense to use these complex molecules from the body's own defense mechanism -- the immune system -- to aid in suppressing and regulating various cellular pathways active during disease response. Many clinicians hope that as our understanding of these drugs improves so, too, will their safety and effectiveness in pinpointing their cellular targets without harming other processes.

The increasing focus on biologics throughout the industry hasn't completely replaced small molecules, though. In fact, one class of small molecules has taken a page out of the book written by some of the market's most successful biologic inhibitors. Given the size of the immunology and oncology markets investors will want to keep an eye on all new entrants. So, can Janus kinase inhibitors, or JAK inhibitors, really challenge biologics at their own game?

What do inhibitors do?
Exactly what the name implies: They treat diseases by blocking the function of naturally occurring proteins or cellular pathways in the body. For instance, several blockbuster biologic inhibitors aim to suppress the protein named tumor necrosis factor-alpha, or TNF-alpha, which fights disease by promoting inflammation:

Source: Company 2012 earnings.       

There are four proteins in the Janus kinase family -- JAK1, JAK2, JAK3, and TYK2 -- that transcend the cell membrane to pass information from the immune system into the heart of cells. This pathway can get out of whack when the body is combating an inflammatory disease or cancer, so regulating it can help restore order and improve a patient's quality of life.

What makes JAK inhibitors a potential competitor to these successful biologics?

For one, small molecules can be manufactured at a much lower cost than their biologic competitors. In theory, they can undercut the market by being priced much lower without sacrificing margins. Unfortunately, the first approved JAK inhibitor for rheumatoid arthritis, Xeljanz from Pfizer (PFE 2.40%), disappointed doctors with its initial pricing. After a costly two decades of development the drug entered the market pegged at $2,000 per month, which was just barely below already expensive biologics. It will likely take the approval of another JAK inhibitor to force Pfizer to lower prices, but that could be years away (see below).  

If pricing is equal, can efficacy save the day? Perhaps, but biologics are upping their game too.

The next generation
In reality, JAK inhibitors are just upstream TNF-alpha inhibitors, which is where the competition is really heating up. Johnson & Johnson's biologic Stelara, which inhibits TNF-alpha indirectly by targeting interleukin, is quietly setting the standard for next generation immunology drugs. While earlier therapies Remicade and Enbrel went head-to-head with methotrexate, the previous standard of care in rheumatoid arthritis, Stelara smoked Enbrel in the first major study pitting two biologics against each other.

If JAK inhibitors can show similarly impressive results, gain approval, and make a splash, then these blockbuster biologics could have some real competition. While the future is promising that "if" is a big one. In the phase 3 trial comparing Stelara and Enbrel, patients received either 24 injections of Enbrel or just two injections of Stelara over a period of 12 weeks. Efficacy and dosing like that sets the bar pretty high.

Market presence
Other than Pfizer, Jakafi/Jakavi from Novartis (NVS 1.93%) is the only other approved JAK inhibitor for any indication (myelofibrosis). Both companies are exploring expanded indications for their first-in-class drugs, while others are pushing their own JAK inhibitors through the pipeline.

The most promising JAK inhibitor in development is Baricitinib from Eli Lilly (LLY -2.63%), which had a strong showing in a phase 2b study for rheumatoid arthritis late last year. However, it will likely be years before data is released from the planned phase 3 trial for the drug. For now, investors looking to get into the new class of drugs will have to settle for Pfizer or Novartis.

Foolish bottom line
Pfizer has the right to recoup research and development costs from Xeljanz, but I think it missed a strategic opportunity to attract the signatures of doctors away from costlier biologics. The price point has effectively turned the drug into a second-line treatment for patients that do not respond to biologics. That could change with time if it does not have any surprises in long-term safety and it is important for patients who fail biologic treatments to have other options, but investors are left wondering what could have been.   

That hasn't stopped several analysts from projecting over $2 billion in sales for Xeljanz by the end of the decade. But given the lack of major JAK inhibitors in development and the fact that their development trails more proven therapies such as Johnson & Johnson's Stelara, it appears that biologics will continue to dominate immunology therapies. The industry will gradually build upon its current understanding of the new class of small molecules, but there are just too many biologics to push out of the way for them to be direct competitors en masse any time soon. Although, as Xeljanz shows, there is still opportunity for those that successfully get to the market.