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The most powerful man in the field of cancer treatment, FDA oncology chief Dr. Richard Pazdur, recently gave some excellent business advice to drugmakers that applies equally well to investors: Stay focused on the cutting edge, and lose the "me too" drugs in the pipeline.
Known as the FDA's "oncology drug czar," Pazdur has been a champion of accelerating new cancer therapies through the regulatory approval process. Under his tenure, the average decision time on oncology drugs has come down to five months from six months.
That's a major acceleration in a category where every month's delay can mean thousands of lost lives -- as well as millions of dollars in delayed drug sales.
In his remarks at the American Society of Clinical Oncology (ASCO), Pazdur was clearly worried that cancer drug makers have lost sight of novel approaches. He said, "People should ask themselves ... would we be better off spending those resources into looking at more novel drugs?"
In particular, Pazdur targeted checkpoint therapies as being in the category of also-rans. In his talk, he consigned AstraZeneca (AZN +0.00%), Pfizer (PFE +0.46%), Merck (MRK 0.75%), and Regeneron (REGN +0.34%) to the "me too" category of drugmakers going after the same objectives with very similar therapies.
But wait! Aren't checkpoint inhibitors the next big thing in the $110 billion market for cancer treatments?
The good news is that checkpoint inhibitors are genuine wonder drugs that have significantly improved patient survival. In fact, former President Jimmy Carter's case shows just how powerful these new drugs can be: He's now cancer-free, having recovered from a dangerous melanoma that had metastasized to his brain. Most patients with his condition would not previously have lived beyond a year.
But Carter's doctors had multiple checkpoint inhibitors at their disposal, including those from Bristol-Myers Squibb, Merck (whose drug the former president received), and Roche Holdings AG. Each of these drugs sports prices of over $150,000 per year.
Pazdur acknowledged that the success of checkpoint inhibitors makes it tempting for rivals to develop similar therapies, rather than investing in unproven treatments. But he also warned that latecomer drugs would be relegated to "niche" categories. Whether he has that right or not, there's no doubt that copycat drugs have much less chance of making a big commercial impact.
As you can imagine, the companies Pazdur lumped into the also-ran category are none too happy.
"We don't look at ourselves as 'latecomers,'" said AstraZeneca VP Bahija Jallal, whose company is now looking for the No. 4 spot on the checkpoint list. "We are leading in multiple areas with combination therapies,"
Investors shouldn't consider think of Pazdur's public criticism of these companies as a reason to shed their shares. Simply temper your expectations for checkpoint inhibitors' revenue contributions (and the implied upside for the developers' stock) when those particular drugs are approved.
So how can an investor find a cutting-edge stock?
In the long term, the biggest gains in biopharma are created through first-in-class or best-in-class drugs. Based on that, investors should look closely at companies with drugs that have the FDA's coveted "breakthrough" designation. There are no guarantees, but such a designation tends to keep the door open for these drugs, so to speak. In the past, Pazdur's group has provided accelerated approvals for breakthrough treatments, often cutting out mid-stage trials and allowing developers to get straight to pivotal work.
On the other hand, even if a drug is genuinely novel, then that alone is not a reason to buy the developer's stock. Investors need to bring other important fundamentals to bear, such as the time to potential commercialization and the financial condition of the company.
For instance, the tiny cancer biotech Syndax may actually have a potential wonder drug in its HDAC inhibitor Entinostat. But while Entinostat received the breakthrough designation way back in September, 2013, the drug is still languishing in early-stage trials. And with only one strong product candidate, significant debt, and no revenue to speak of, Syndax has a strong chance of making much, if not all, of your investment money disappear.
Charting the winners: Three megablockbusters and a hidden gem
Let's single out some potential winners that meet the following criteria:
- Cancer drugs with FDA-awarded "breakthrough" designations
- Drugs that offer an approach that isn't similar to other approved targeted treatments on the market
- The ability to overcome the financial challenges of running commercial-scale manufacturing processes
- Drugs likely to be commercialized in the next year or so.
Based on those criteria, here are four promising candidates to watch:
In terms of megablockbusters on tap, Juno Therapeutics (JUNO +0.00%) and Kite Pharma (NASDAQ: KITE) lead the way with their revolutionary new CAR-T candidates. Juno and Kite are fighting it out to be first to market, but Kite clearly has the edge right now, since a recent shock announcement came that the FDA had halted Juno's clinical trial. Last Thursday, it was reported that several people died during Juno's Phase II ROCKET trial. On the news, Juno's stock lost almost a third of its value, plunging 32%.
Since then, Juno's ROCKET trial was restarted--without the use of chemo agent fludarabine, which was identified as the likely factor in the reported deaths. But another unpleasant surprise to Juno investors came this week when the company corrected the number of trial deaths. The company's Chief Medical Officer Mark Gilbert had reported three deaths, but in a corrected transcript, the company noted that a fourth patient died last year in the trial of a different CAR-T therapy.
What's the read across to Kite, whose stock rose and fell in sympathy on Juno's bad news? While Kite has also used fludarabine in its clinical trials, Kite's regimen requires a much weaker dosing than Juno's constructs. Critically, the fludarabine/cyclophosphamide dosing used by Juno--associated with all four cerebral edema cases--is roughly four times higher than Kite's. Overall, since the extremely high dosing likely contributed to the deaths, Kite appears a safer bet than Juno.
In this frenzied race, Swiss-based megacap Novartis AG (NVS 0.66%) is generally seen as coming in third, as CTL019 is not due to be filed until 2017 instead of 2016. But the potential size of the CAR-T space, which has seen deals valued at more than a half-billion dollars, and the likely expansion of CAR-T therapies into a wide variety of cancers, still makes third place an enviable position.
What about financing? Deep-pocketed Novartis has the edge here, but Juno and Kite nonetheless ended 2015 with $1.2 billion and $615 million in cash, respectively. That should be sufficient to get them through the expected cash burn of around $220 million to $250 million to ramp up commercial potential as they fight to put the first CAR-T therapy on the market.
As for cancer opportunities flying much more under the radar, take a look at Jazz Pharmaceuticals' (JAZZ 0.27%) Vyxeos, which Jazz acquired in its buyout of Celator Pharmaceuticals. The drug may hold a lot of untapped potential. If approved, it will be the first new treatment available for a form of high-risk blood cancer in over 40 years. In fact, Vyxeos could easily become the standard of care, as it has prolonged overall survival for acute myeloid leukemia patients and enabled more convenient outpatient treatment.
Looking ahead
With the cancer industry likely to rack up a host of approvals in the coming years, further crowding the field, it's time for investors to be very selective. Be sure to appreciate the risks as well as the opportunities and understand a drug's market potential. The goal is to find medicines that work well, work long, and have the potential to even cure cancer in a metastatic form.
In line with that, you might want to take a closer look at companies whose drugs fall in line with the advice from the FDA's oncology czar. Dr. Pazdur has the inside track on cancer. He's one of those people you may not agree with, but you have to listen to.
