Scary Diseases and Health Innovations Catching the Attention of Long-term Investors
Art by Chris Buzelli
Health care innovations, once slowed by regulation and infrastructure, are now accelerating due to technology, gene therapies, and electronic medical records. Baby boomers are getting older. Populous countries such as China are creating a hot demand for cancer treatments. Health care spending is nearly 20% of the United States’ gross domestic product (GDP). In short, for those investors with long time horizons, health care investing and burgeoning innovations are continuing to weave their way into broader conversations.
China, for example, with its population of 1.4 billion, has an urgent demand for treatments in lung cancer. It is projected that lung cancer mortality in China may increase by approximately 40% between 2015 and 2030, according to Thoracic Cancer research. Data from 2008 shows it was responsible for 21% of the cancers in the country, followed by stomach (19.5%), liver (18.1%), and esophagus (10.8%), according to data from the GLOBOCAN 2008 database, and a comparison paper in Cancer Biology and Medicine.
“China represents somewhere around 25% to 30% of the world’s cancer population. So they have a huge, huge problem on their hands from all sorts of varying different types of cancers within their population,” said Martin Jarzebowski, a CFA, vice president, and portfolio manager of Federated Investors, who studies health care innovation and its applications across the marketplace.
Biopharmaceutical companies are jockeying for position in China’s marketplace to meet the large patient demand. Yet they are treading carefully in the foreign terrain with its different approach to intellectual property and unique regulatory processes. Certain companies, such as AstraZeneca (AZN), which retains the most exposure to China and accounts for almost 20% of total sales, are investing more time and resources than others to unstick the red tape and head through the Chinese wall, said Jarzebowski. This doesn’t mean, however that they won’t face competition from fleets of Chinese companies that are making large strides and allocating large amounts of resources to treat their own population.
China also has the global distinction of holding the most Car-T trials, which give the body’s immune system (or, more specifically, its T cells) the ability to target specific threats, such as cancer, inside the body.
Outside of China, Gilead and Novartis are the main companies that have approved treatments in mostly blood cancers, according to Karen Andersen, health care strategist at Morningstar. “They’re being tested in very late-stage patients and we’re seeing close to 30% or 40% of patients have a complete response. So that means that basically all signs of the cancer disappear and doctors are following them to try to see how long that kind of response can last.”
Cancer-Fighting Cocktails
Checkpoint inhibitor drugs have established a foundation in the cancer space. While cancer cells are good at camouflaging themselves and blending in, checkpoint inhibitor drugs allow the body’s immune system to see and un-cloak the cancer cells and potentially fight them. Now, however, scientists are taking the next logical step. Trials are using them with a combination of drugs that rev up the body’s immune system to give a person a turbo-boost to target, fight, and destroy the uncloaked cancer cells.
“That’s been a real clear area of innovation in the pharmaceutical space and we expect that trend to continue for quite some time,” said Allen Bond, managing director-portfolio manager of Jensen Investment Management.
“Pfizer’s got a very successful drug focused on breast cancer, and Johnson & Johnson has several, one focused on myeloma [and] one focused on leukemia, that are doing well. So they’re benefitting from that growth and we still think there’s more innovation to come in that space.”
Hospital Ownership
As health care costs continue to rise, some hospitals are considering different models. In Brazil, for example, HMO-owned hospitals are shaving costs and creating fierce price-point competition in the marketplace.
“There [are] certain HMOs that have superior business models, in my opinion, as they own both the hospital and the insurer, allowing them to better manage care throughout the supply chain. In recent years, [Brazil’s] health care costs have been surging 15-20% per annum. The types of companies I’ve described have avoided some of the runaway inflation that has plagued much of the Brazilian health care industry,” said Peter Gillespie, portfolio manager on the Developing Markets Equity team at Lazard Asset Management.
Robots
Flip on any medical television drama, and a group of doctors in green gowns are huddled around a patient manually performing surgeries. But in many real operating rooms, robots and robotic arms are actually assisting surgeries, and even making incisions, with the goal of improving the precision and decreasing the time of the procedure.
Some are even becoming the answer for remote areas where the long trip to a heart surgeon during a heart attack could mean life or death. The Helmsley Charitable Trust, for example, has granted more than $3 million to the Mayo Clinic to develop a new robot that would allow a cardiac surgeon to remotely operate on a patient from hundreds of miles away. Since surgeons often spend long hours standing on their feet, the robot console will increase the longevity of the surgeon, and is hoped to increase precision, create less scar tissue, cause less bleeding, and shorten patient recovery time.
With the Terminator movies still referenced in our pop culture, perhaps we’re not fully ready to hand our bodies completely over to robots while we’re still alive. And as with any new technology, some things are being ironed out. Critics have noted a lack of standardization and benchmarks in training curricula and accreditation guidelines to ensure surgeon competence and patient safety for robotic surgeries.
Yet companies such as Stryker and Zimmer have given themselves an edge with robots that are first to appear in the training rooms. “Stryker launched the first market robot-assisted surgery platform for hip and knee surgeries and they really had a two-plus-year head start on the market with that,” said Bond. “It’s allowed them to get into accounts where they never had much market share before and that’s resulted in them posting very good gains relative to their competitors in that space.”
Similar to iPhone vs. Android users, as you head to teaching hospitals, you will find a delineation of surgeons who were either trained on Stryker (Mako) machines or Zimmer (Rosa) machines, noted Jarzebowski.
“Within health care, many investors view medical devices and certain life science tool companies as being relatively insulated from the regulatory pressures that we’re seeing,” he said.
Matters of the Heart
Cardiovascular diseases are the No. 1 cause of death globally and another device is also changing heart surgery. It’s now often unnecessary to crack open a patient’s ribs and scar them to perform a surgery, due to a tiny device called a TAVR (a transcatheter aortic valve replacement) from Edwards Lifescience.
Severe aortic stenosis has a grave prognosis, with 25-50% of patients dying within a year when symptoms develop, but about one-third to one-half of patients with severe aortic stenosis are not offered surgery. Consider an 85-year-old patient who might be a bit frail and might have co-morbidities. Perhaps the last thing he needs is open heart surgery. Instead, he opts for the TAVR. “He goes in the afternoon, he has this thing in through his arm and voila,” said Mara Der Hovanesian, senior research analyst, Vontobel Quality Growth.
It’s supposed to better chances of recovery, reduce chance of relapse, increase quality of life, and lower cost. The company is now working on similar valve replacements for other parts of the body.
Big Data
Google, Amazon, and United Healthcare all have venture capital arms that are finding ways to use data. Triangulation and transport of a sick patient desperately searching the internet for answers may become a reality.
“The idea is that you’ll be able to predict if someone’s googling something, predict that they’re sick, that they’re going to be sick, that they’re having a relapse, what’s the best doctor, use GPS, figure out who’s closest, get them there,” said Vontobel’s Der Hovanesian. She thinks of United Healthcare as a technology company with reams of data “on not just procedures and clinical data but also the claims side.”
“They’re helping employers find the sickest employees. They’re helping states, through the people who are on Medicare and Medicaid, find the ones who are costing the system the most money. Provide them housing if need be,” she said. The goals are changing. “It’s no longer about withholding care…It’s about giving them everything they need and giving them the right drugs and giving them the right care so they don’t get sicker.”
Big data is also helping medical trials, as it often costs around $2 billion to bring something new to market. The trials often need enough patients to form two groups with the same affliction: one group that gets the new treatment, and the group that gets the “sugar pill” or placebo, the one that gets no treatment, in order to measure the treatment’s efficacy. Before the trials, doctors need to find a number of patients to fill the two groups. Electronic medical records are streamlining the process. Now patients with similar maladies can be found more quickly, and their doctors can be contacted, through companies such as IQVIA. Interestingly, IQVIA first made its mark with prescriptions data, and tracking all of the different prescription trends around the world.
“They’ve invested in a tremendous amount of technology and analytics and AI in order to be able to have these massive amounts of patient records, analyze them very, very quickly, and start to identify where different patient populations are so that they can be much more precise and much more efficient in being able to enroll as well as manage a clinical trial,” said Jarzebowski.
Patent expiration, BioSimilars and Gene Therapy
Drug patents last 20 years. Biosimilar drugs, which contain living cells and are able to dodge patent laws, are undercutting the prices of some drugs by 30%. Both are creating risk.
The immunology drugs Remicade and Enbrel were the first to face biosimilar risk, starting from Europe and now in the US, noted Bond, and biosimilar risk is still evolving.
Also, as key patents of leading pharma companies including Humira and Stelara expire, $251 billion of sales will be at risk between 2018 and 2024, with more than 25% of these in 2023, according to the data and analysis firm EvaluatePharma.
Big Pharma companies are seeking to fill the gap by acquiring smaller biotech companies, known for their innovations. Many of those smaller companies are centered around gene therapies and have found their niche exploring orphan diseases where there is no other known cure. They take blood samples, fix the mutated gene, and then introduce the body to a way to fight the mutation.
Roche acquired Spark Therapeutics which launched the first FDA-approved gene therapy for vision loss (Luxturna) in 2018, and also specializes in hemophilia.
Novartis acquired AveXis, which had a specific product for spinal muscular atrophy, for $8.7 billion. It launched a drug called Zolgensma to be priced at about $2 million per treatment, or $4 million for 10 years of treatments (now dubbed the world’s most expensive treatment by Forbes.) Insurance companies were offered packages of $425,000 per year. It’s a “value-based” price tag for a treatment that’s almost guaranteed to work, and supposedly gives functionality to the patient that had been unimaginable in the past. Value-based treatments “have to prove efficacy. They have to improve the outcome,” said Vontobel’s Der Hovanesian.
Although new treatments may only average $1 billion as they launch in 2020, Jarzebowski believes they can easily scale up to $15 billion in five years.
“Right now, you’re seeing a lot of clinical trials focused on areas within neurology or areas within ophthalmology and retinal diseases or hematology,” said Jarzebowski. “Even with small sample sizes, you’re seeing a tremendous amount of revolution in terms of potential cures coming out of the space.”
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