Gilead Sciences (NASDAQ:GILD) and Novartis (NYSE:NVS) have enormous resources to acquire, develop, and market some miraculous new cancer therapies, but selling these treatments has been a lot tougher than expected.
Hold on to your seat because the Centers for Medicare and Medicaid Services (CMS) recently released 1,800 pages of proposed rule changes. One of those changes could breathe life back into sales and development of new drugs that use chimeric antigen receptor-modified T-cells (CAR-T) to go after cancer.
The problem with CAR-T therapies
This approach works better than anyone could have hoped for, but the process is a little complicated. Removing a patient's blood cells, then conditioning them for a successful reinfusion can rack up huge additional expenses that nobody's quite sure how to pay for.
So far, sales of two CAR-T therapies, Yescarta from Gilead Sciences and Kymriah from Novartis, have been disappointing. Gilead spent $12 billion to acquire its CAR-T therapy franchise a couple of months before Yescarta launched in October 2017, and sales during the last three months of 2018 climbed to just $324 million annualized.
Novartis is a lot bigger than Gilead, but its CAR-T therapy isn't doing any better. During the first quarter of 2019, Kymriah sales rose to an annualized $180 million.
Yescarta and Kymriah are both used to treat people with non-Hodgkin lymphomas that keep relapsing after standard treatments can't get the job done. These patients are so difficult to treat that a complete response rate in the single digits used to be front-page news. During a trial leading to Yescarta's approval, a breathtaking 52 out of 101 patients achieved complete remission.
It didn't happen overnight, but commercial payers are coming around to the idea that a one-time infusion of a drug with a six-figure price tag also includes a six-figure hospital bill. When administrators at the CMS noticed Medicare patients were missing a chance for long-term survival because of an antiquated payment system that couldn't accommodate CAR-T, it was clearly time for a change.
The CMS wants to put an end to cases of curtailed access to CAR-T therapies that occur because hospitals don't know how they're going to get paid to provide them. Existing "technology add-on payments" aren't nearly enough, but raising them across the board would burst the agency's budget. Luckily, the CMS has a reasonable solution.
The CMS already offers something called technology add-on payments, but they're generally limited to less than half the price of the drug itself. The new rules aren't in play yet, but the CMS expects to add a new policy that would provide a larger technology add-on payment for complex, single-administration gene therapies across the board and CAR-T therapies, specifically. It will take a couple of months to hammer out a new formula to calculate hospital payments for CAR-T treatments, but this step forward could make a big impact on drugmakers large and small.
In 2020, Gilead Sciences and Novartis could end up reporting a huge boost to sales of the CAR-T therapies they're already marketing. That's because the lymphomas they're approved to treat are most frequently diagnosed in people age 65 to 74 years old.
Any stocks to buy here?
You can do a lot worse than Gilead Sciences and Novartis, but neither of these stocks will beat the market thanks to their CAR-T programs alone. They're just too large and diverse, especially Novartis.
Since many of the most promising CAR-T focused biotechs have already been acquired, there aren't a lot of options to choose from at the moment. Luckily, bluebird bio (NASDAQ:BLUE) hasn't been snapped up yet.
Bluebird's lead candidate, the experimental therapy formerly known as LentiGlobin, has been renamed Zynteglo in the EU, and an approval to treat patients with transfusion-dependent beta-thalassemia in that region is probably on the way. Bluebird should have a similar application in front of the Food and Drug Administration (FDA) by the end of 2019.
There aren't a whole lot of Medicare patients with thalassemia, but Bluebird's developing a CAR-T therapy for multiple myeloma patients, and most of them are old enough for Medicare. Celgene licensed rights to develop bb2121, and soon those rights will belong to Bristol-Myers Squibb.
We won't see pivotal trial results for Bluebird's partnered CAR-T program until later this year, but the development risk for bb2121 belongs to Bristol-Myers now. All that Bluebird has to lose is a potential royalty stream, remaining milestone payments, and its reputation.
Know the risks
Although the proposed rule changes for CAR-T could be a big help for Bluebird's partnership, it's important to remember that this clinical-stage biotech doesn't have a revenue stream yet. Zynteglo could become a blockbuster if approved as expected by the FDA -- but the agency does throw curveballs now and then.
Bluebird's market cap slid 11.3% over the past 12 months but it's still high enough at $7.5 billion that unexpected delays could lead to heavy losses. The stock looks like a buy at recent prices, but only for investors who can handle the risk.