If an ounce of prevention is worth a pound of cure, how much is a cure worth? Specifically, how much is a cure worth as compared to treating a disease on an ongoing basis? This is a question that the healthcare industry now must tackle.
Biopharmaceutical companies are making more progress than ever before at not just treating diseases but developing cures for the diseases. The possibility that patients afflicted with serious conditions could regain their health is an exciting one, certainly for the patients and their families, but also for society as a whole.
It could also, though, cause an upheaval in the economics of our healthcare system. And for biotech investors, it could radically change how they should look at the stocks of companies that develop cures and of those that currently develop treatments for conditions for which cures could be on the way.
A brief history of cured diseases
Any discussion about diseases that have already been cured will be a short one. There are very few diseases for which cures have been developed.
Some people refer to diseases like polio and smallpox that ravaged previous generations as having been cured. It's true that these diseases aren't nearly as problematic as they once were. For example, in the early 1950s polio outbreaks caused more than 15,000 people to be paralyzed each year. The number began to dramatically fall during the end of the decade. There have been no cases of polio reported in the U.S. since 1979. And worldwide cases of polio have dropped 99% since 1988, according to the World Health Organization.
But polio hasn't actually been cured. Instead, highly effective vaccines have been developed to prevent infection from the virus that causes polio. It's the same story for smallpox, which has been declared to be completely eradicated, and a few other infectious diseases that have been largely eradicated.
There are two diseases that have actually been cured, though. In 2016, Margaret Anderson, executive director of nonprofit Milken Institute's Faster Cures organization, told The Washington Post that she was aware of only one disease that has been cured -- hepatitis C. Gilead Sciences (NASDAQ:GILD) won U.S. Food and Drug Administration (FDA) approval for Sovaldi in December 2013. Subsequent drugs from Gilead and others effectively cured up to 98% of hepatitis C patients.
More recently, Spark Therapeutics (NASDAQ:ONCE) gained FDA approval in December 2017 for Luxturna, a gene therapy treatment for a rare retinal disease caused by a specific gene mutation. The press hailed Spark's gene therapy as a cure for a rare type of blindness -- and rightly so. Luxturna is a one-time treatment. In clinical studies, patients who received the gene therapy were able to see much better in low light than patients who were in the control group.
Following the money
The financial impact of a cure can probably best be seen with what has happened in hepatitis C. Let's look at three drugmakers -- Bristol-Myers Squibb (NYSE:BMY), Gilead Sciences, and Merck (NYSE:MRK).
Bristol-Myers Squibb (BMS) wasn't a major player in hepatitis C until it launched Daklinza in Europe in 2014 and in the U.S. in 2015. Merck, on the other hand, was prominent in the market for years with hep-C drugs such as Pegintron and Victrelis. Gilead's first full year of competing in the hepatitis C market came in 2014 with the launch of Sovaldi.
The experiences of these three drugmakers were dramatically different before and after Gilead's hep-C cure entered the scene. The two charts below tell the story.
The first chart shows how Merck was rocking along until 2014, when its hepatitis C revenue dropped dramatically. By 2015, Merck's hep-C revenue was a shadow of what it had been. Merck, however, surged back thanks to its launch of Zepatier, a cure for hepatitis C that came in the footsteps of Gilead's Sovaldi.
Relative latecomer BMS enjoyed a couple of years in the sun after the launch of Daklinza. The good times didn't last long, though.
The second chart was necessary because Gilead's success made the other companies' sales look nearly insignificant by comparison. Gilead's franchise of hepatitis C drugs, led by Sovaldi and followed by Harvoni, Epclusa, and Vosevi, dominated the market -- for a while.
However, note the steep sales decline that began in 2016. This drop in sales stemmed partially from the emergence of new competition from Merck and AbbVie, both of which developed hepatitis C cures of their own. However, an even bigger issue was that there simply weren't as many patients left to be treated after the initial wave of patients were cured of hepatitis C.
What these two charts don't show is that BMS and Merck are now essentially has-beens in the hepatitis C market. BMS reported hep-C sales in the first half of 2018 of only $15 million. Merck's hepatitis C revenue totaled $243 million during the same period -- nearly as low as its nadir in 2015. The hepatitis C market has boiled down to a battle between two cures -- Gilead's and AbbVie's. And both of these big companies are fighting over a slowly declining group of patients.
The stories behind these two charts underscore two critical truths that investors must acknowledge. First, companies that achieve success with effective treatments for a disease can quickly see that success evaporate when a cure reaches the market. Second, companies that develop cures can make enormous revenue right out of the gate, but they too will likely experience significant sales declines following the initial spike.
It's too soon to know what will happen with Spark Therapeutics. The biotech priced Luxturna at $850,000 for the one-time treatment, or $425,000 per eye. While the price tag was less than the $1 million expected by some observers, Luxturna still became one of the most expensive therapies on the market.
Some payers could push back on such a steep cost. However, pharmacy benefits manager (PBM) Express Scripts' chief medical officer, Steve Miller, stated that Spark priced its gene therapy "responsibly."
The coming golden age of medicine
A golden age of medicine could be just around the corner. Gene therapies, such as Spark Therapeutics' Luxturna, hold the promise of curing some genetic diseases through the introduction of functional genes into cells to correct missing or defective genes. Gene editing, in which mutations are corrected by directly modifying DNA, could present an even greater opportunity.
Most of the efforts so far have focused on developing cures for rare genetic diseases. CRISPR Therapeutics' lead programs (NASDAQ:CRSP), for example, use CRISPR-Cas9 gene editing for targeting rare blood disorders beta-thalassemia and sickle cell disease. Editas Medicine's (NASDAQ:EDIT) lead candidate also uses CRISPR-Cas9 for addressing the most common -- but still rare -- form of hereditary childhood blindness, Leber congenital amaurosis type 10 (LCA10).
It's still really early for both of these biotechs. Neither has begun clinical testing in humans yet but hope to do so in the near future. What happens if they are ultimately successful?
Editas Medicine could follow a similar path as Spark Therapeutics. The biotech would definitely need to price its LCA10 therapy really high. Many payers could agree to such a high price tag, like Express Scripts has for Luxturna, because there aren't many patients with the disease and there are no other effective treatments.
If CRISPR Therapeutics is successful in beta-thalassemia, though, we could see a similar scenario to that of hepatitis C. Celgene, for example, thinks that is has a potential blockbuster beta-thalassemia drug on the way with luspatercept. An effective cure for beta-thalassemia could severely cut sales for Celgene's drug down the road, although the big biotech is also pursuing other indications for luspatercept.
But the biggest upheaval could come if cures are developed for diseases that aren't so rare. Gilead is actively working on developing a cure for HIV. The company reported encouraging preclinical results with a combination of two experimental drugs curing nearly half of the HIV-infected monkeys that received the drugs.
Gilead faces an interesting dilemma. It wants to cure HIV and is plowing forward with those efforts. At the same time, the company made $14 billion in 2017 from its HIV treatments. A cure would undermine those sales.
A new paradigm for biotech investors
All of this presents a new paradigm for biotech investors. Competition for companies' drugs is one thing. But the prospects for cures of the diseases that those drugs target presents an entirely different ball game. What should investors do?
First, before buying a biotech or pharma stock, gain a solid understanding of the competitive dynamics in the markets where the company currently operates or is developing new drugs. This is an important step even if no potentially curative therapies are being developed for any of the indications the company targets.
Second, research the companies that are developing the potential cures. Find out how far along they are and what the potential roadblocks to their technology could be. Another important thing to look for in small biotechs that are developing cures is whether or not big third-parties are investing in them or partnering with them. When a major player commits a lot of money in partnering with a small biotech, it can be a good sign that the small biotech's technology should be taken seriously.
Third, listen for what management of the drugmaker currently marketing or developing non-curative treatments says about the potential competition. You can feel better about the stock if executives seem to have a good strategy in place.
Fourth, you might want to consider hedging your bets by buying a position in the stocks of potential competitors that are developing cures. If investing in a clinical-stage biotech or preclinical-stage biotech is too risky for you, think about buying shares of a larger company that has partnered with the smaller biotech (assuming there is one).
There's one thing that biotech investors shouldn't do: Dismiss the threat from potential cures. Yes, it's still early. Some experimental cures won't pan out. But Francis Collins, leader of the Human Genome Project and current Director of the National Institutes for Health, said, "I think developing cures for all diseases is certainly something that we could imagine happening in the course of this century." Note his use of the word "all."
What's a pound of cure worth? Possibly billions of dollars for some companies. And it could cost billions of dollars for others. Fortunes for biotechs -- and biotech investors -- are at stake.