Fortnightly Thoughts
March 6, 2014
Issue 70
Healthcare innovation on the mend?
From the editor: In this edition we examine two key themes; the improving pace of innovation
and how to pay for the rising demand for, and price of, healthcare. We interview three experts
on these issues and have pieces from our global healthcare analysts.
Healthcare is clearly different from most
industries in many ways; the degree of
regulation, the specialist knowledge
requirement and the exposure to
governments as customers, are all
unusually high. But in some ways, pharma,
in particular, is similar to other high return
industries. It always needs to find new
products and management’s cash
allocation decisions, as they seek to refresh
and replenish portfolios either organically or
through acquisitions, are crucial. Finding
structurally growing patient pools or
products that are superior in capability has
produced stellar performance in terms of
total shareholder return - Bristol-Myers,
Shire, Novo Nordisk and Roche are all well
positioned here. Lots of themes touch
healthcare – demographics, middle class
lifestyles (DM and increasingly EM), the
role of government, the importance of IP,
dominators buying disruptors and the
ubiquity of technology.
What’s inside
Healthy returns
Sector CROCI levels versus volatility, GS European coverage
8%
Technology
Standard deviation of CROCI 2003-2017E
7%
Oil Services
6%
Mining
5%
Media
Steel
4%
3%
2%
1%
Autos
Construction
Oil
Business
Trans
Svcs.
and Trav
Aerospace
Machinery
Retail
Consumer Products
Chemicals
Utilities
Telecoms
0%
5%
10%
But for much of this edition, we focus on
innovation as we look at growing disease
areas e.g. Alzheimer’s and new treatment
solutions e.g. immunotherapy, genomics,
3D printing, stem cells. Our interviews are
with experts on cancer and the US pharma
industry – Dr. Peter Bach of Memorial
Sloan-Kettering, on the role of government
and the UK healthcare system - Sir Michael
Rawlins and Sir John Chisholm who chairs
Genomics England.
15%
MedTech
Pharma
20%
25%
30%
Average market cap weighted CROCI 2003-17E
Source: Goldman Sachs Global Investment Research.
Hugo Scott-Gall
[email protected]
+44 (20) 7774 1917
Goldman Sachs International
Sumana Manohar, CFA
[email protected]
+44 (20) 7051 9677
Goldman Sachs International
Innovation on the mend?: Our lead article
2
Change is the only constant: European pharma
team on emerging therapeutic areas
5
Interview with…Sir John Chisholm: Executive
Chairman of Genomics England
8
Genomics: Changing pharma: Isaac Ro
10
Interview with…Dr. Peter Bach: Director,
Memorial Sloan-Kettering Cancer Center
12
Cancer immunotherapy is paradigm changing:
Jami Rubin
14
Interview with…Sir Michael Rawlins: President,
UK’s Royal Society of Medicine
16
Making the case for stem cells: Andrea Chong
18
China: Insurance key for healthcare reform:
Wei Du
20
The 3D printing revolution: Veronika Dubajova
22
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see
the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not
registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research
Fortnightly Thoughts
Issue 70
Healthcare innovation on the mend?
An expanding opportunity set, rising costs for constrained
governments as well as consumers, new enabling technologies and
signs of a fresh wave of innovation, together place the healthcare
industry at a fascinating juncture. These factors, taken in the
context of the large revenue pools and stable (and often high)
returns that the industry has to offer should make it ripe for
disruption. In the pages that follow, our global healthcare analysts
delve into where we see opportunities for disruptive innovation and
who is driving it, while in this essay, we focus on what the problem
is, why it needs to be resolved and how we can identify genuine
winners in the industry.
Generalist practitioner
The healthcare complex ticks many of our key thematic boxes –
changing consumer habits (food and wellness), dominators versus
disruptors, the ubiquity of technology (data, analytics and devices),
the role of governments and demographics, with the latter two at
the heart of the healthcare conundrum. About 60% of global
population growth by 2040 is expected to come from those older
than 54 years, who on average spend double on healthcare than
the rest of the population (in the US). So the demand for drugs and
services is set to rise further. Compounding that is the rising per
capita cost of healthcare, particularly pharmaceutical drugs; the
inflation adjusted expenditure per person has risen in most major
economies over the last decade.
Real growth
Annual average growth in expenditure on health and pharmaceuticals,
in real terms, 2000-2011
10%
physicians, hospitals, long-term care etc. In the US, where private
participants still dominate these parts of the value chain (except
medicare/ medicaid), the last few years have been marked by
consolidation. Independent hospitals are becoming parts of larger
chains driven by reimbursement pressures, higher penalties for
low-quality care and economies of scale. Front-end pharmacies
have consolidated too (Walgreens, Rite Aid and CVS account for
70% of the drug retail market) and now have better negotiating
power with their suppliers. For instance, almost all front-end
retailers in the US buy generics directly from drug manufacturers,
disintermediating wholesale distributors (which have similarly been
through a consolidation phase).
Such a competitive environment has brought down costs to an
extent and there might be potential for more efficiency, via
automation and technology, but there isn’t much juice left. The
median operating profit margin for all the listed healthcare providers
in the US was 8% in 2012 versus over 20% for pharmaceuticals
and medtech. In other words, despite accounting for c.50% of total
revenues in the industry, healthcare providers generate less than a
quarter of the operating profits (versus pharma – 32% of revenue
and 50% of EBIT in 2012). Of course in most of the other DMs,
healthcare delivery is typically provided by governments, and
reforming labour costs - wages and headcount - is politically, a
difficult pill to swallow (the UK’s NHS was the 5th largest employer
in the world in 2012). And so here too, policy makers tend to focus
on drug producers to reduce costs.
Pharma is a sweet spot
% of total listed healthcare industry, by sector, 2012
Pharmaceuticals
Biotechnology
Healthcare Providers
Medical Equipment
Medical Supplies
8%
Healthcare
Employees
Pharmaceutical drugs
6%
Operating profit
4%
2%
Sales
0%
R&D
Italy
Switz.
France
Denmark
Germany
Norway
Australia
Canada
US
Sweden
Japan
Spain
Finland
UK
Korea
Netherlands
-2%
Source: OECD.
Market Value
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: Datastream.
More effective drugs, targeted treatments and solutions for rare
conditions or previously terminal diseases represent much progress
made by the industry, but they naturally come at a greater cost,
which in most DMs is borne by governments (>60% of total
healthcare spend in the OECD). Over the last decade, the
proportion of government outlays spent on healthcare has risen in
almost every advanced economy, with some of the biggest shifts
coming in Netherlands, Switzerland and China. And the future looks
no different. Given that demographic (healthcare demand) trends
are essentially irreversible in the medium term in many of these
economies, governments have few options to ease the healthcare
burden – increase funding (either raise taxes or reallocate funds
from other, more productive areas) or decrease spending (pay less
or pay for fewer treatments).
Cost cutting difficult
Where can costs be cut? To answer that, we need to first look at
where healthcare dollars are being spent. Drugs and medical goods
account for about 20% of total expenditure in DMs, with the rest
going to healthcare delivery and services – logistics, pharmacies,
Goldman Sachs Global Investment Research
Why are returns so high for big pharma?
Pharma provides one of the most attractive cash return profiles on
a market-cap weighted basis (second only to technology for 201417E for our European coverage) which reflects its innovationintensive nature; i.e. high-returns are driven by monopolistic pricing
which are justified by the significant levels of risk capital necessary
for bringing a drug to market, which in most cases takes several
years. This in itself does not preclude new, small entrants (e.g.
Innate Pharma) from competing with the incumbents. But bigger
companies that have invested in a portfolio of drugs, often in
different stages of development (i.e. diversification) are better
placed to sustainably manage this R&D risk, and the associated
regulatory hurdles over the long run. Additionally, big
pharmaceutical companies have also consistently used their large
balance sheets to acquire innovation; large cap pharma companies
in Europe have spent about $300 bn on M&A in the last 10 years
compared to $390 bn on R&D. The biotech space is a case in point.
Roche-Genentech, Sanofi-Genzyme, Bristol-Myers-Mederex are
among the many examples of in this context.
2
Fortnightly Thoughts
Issue 70
This brings us to the unique challenge for pharmaceutical
companies. Unlike broader, successful consumer product
companies that can rely on the strength of their brands to generate
revenues for an extended period of time, pharma companies (even
the ones with the best drugs) have a finite number of years to
recoup their investment given the patent cycle, which means that
there is a constant need to renew their product pipeline. Pharma
management teams are then particularly important cash allocators,
taking cash flow from mature assets and redeploying into organic
(R&D) or inorganic (M&A) innovation. Shire is an example of a
serial acquirer, which has acquired nearly every product it sells
today.
Purchasing skills
Shire expenditure on R&D and M&A, US$ mn
5,000
4,500
R&D expense
M&A/inlicense payment
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2007
2008
2009
2010
2011
2012
2013
*Caveats: 1. M&A payments only included for where data is disclosed, 2. Payments are the maximum gross
amount that would be paid out as per agreement, and 3. 2007 New River deal was funded by raising debt and
equity financing
Source: Goldman Sachs Global Investment Research.
Cash managers
This constant need to replenish their product portfolios also
perhaps explains why despite having relatively high and stable
cash returns on an industry level, individual pharma companies
have an unusually short duration of returns leadership versus other
sectors in our coverage i.e. top-quartile cash return (Q1 CROCI)
generating companies remain Q1 for an average of 6.6 years
compared to a cross-sector average of 7.3 years. But there are
exceptions of course. Globally, Novo Nordisk, Shire and Roche are
the only three large cap pharmaceutical companies which have
generated above sector-median CROCI since 2009 and our
analysts expect them to continue to do so at least until 2017.
Consistent with that, the three stocks also have yielded very high
market relative total returns over the past decade with Novo in
particular standing out (>800% since 2001). What do they have in
common? They all tick at least one of the following boxes – growth
in patient pool size, higher relative product capability or scale (for
meaningfully lower cost of production) and therefore a dominant
position.
So, what lies ahead? On page 5, Keyur Parekh identifies where
patient pools are growing (spoiler alert: Alzheimer’s, heart failure,
new therapies for cancer), noting that a first mover in these areas
could have a significant advantage. A case in point here is BristolMyers, which has adapted its portfolio to include immunotherapy,
an emerging therapeutic area of oncology, which should, in our
analysts’ point of view, improve its longer-term positioning. Spotting
the right growth market and backing the right projects (or buying the
right targets) beats the fade and allows for superior earnings
Goldman Sachs Global Investment Research
growth. To generate alpha, identifying the companies that get this
right has mattered more than near-term valuation. To make this
point in a different way, if we consider Novo Nordisk at the start of
2002, the starting multiple that we would have had to pay for it to
just to match the market in the next decade would have been 63x
2003 EPS. Earnings power is what matters most.
Is pricing power invincible?
All else being equal, in an industry with high entry barriers
(patents), companies that dominate their respective markets (such
as types of cancer, vaccine, insulin, biologics) should enjoy
excellent pricing power. And this has contributed to drug price
inflation, perhaps most evidently in the US. But how does this
reconcile with the need to reduce healthcare costs? In our interview
with Sir Michael Rawlins on page 16, he speaks about the NICE
model in the UK which looks at assessing the price of a drug based
on the incremental benefit it provides to the user; essentially a
monopsony market where the price is determined by the value of
the product rather than the cost of its manufacture. On page 12, we
speak to Dr. Peter Bach who argues for a similar model in the US,
but notes that with a mostly private company led industry, valuebased pricing will be much harder to achieve.
The vital signs of the next innovation wave
Innovation and new revenue opportunities go hand in hand and
there are a number of new treatment areas that show that
innovation is accelerating after a relatively dormant decade. On
page 14, Jami Rubin writes about the potential in immunotherapy to
treat cancer, which works by harnessing the immune system to
fight off cancer cells rather than the traditional treatments which
target cancer cells themselves. On page 10, Isaac Ro notes the
significant cost improvements made in gene sequencing technology
and how it can revolutionise diagnosis, pre-diagnosis and treatment
efficacy. On page 18, Andrea Chong highlights the progress made
in stem cell research and the potential use in several areas such as
cardiovascular conditions, orthopaedic diseases etc. And on page
24, Veronika Dubajova delves into the use of 3D printing
technology for customised solutions in medtech and what it could
mean for prosthetics and artificial organs in the future. These
developments are all exciting and can potentially improve the
length and/or quality of human lives considerably. But are they all
necessarily cost-effective?
In an industry that competes primarily on capability rather than cost,
given the price inelastic nature of its products, it is not surprising
that many of these innovations are focused on providing better
(albeit relatively expensive) solutions. Given that private-sector
innovators and governments have a different and diverging set of
priorities (profits vs. costs), the solution may well lie in the direction
of a combined effort between the two. We interview Sir John
Chisholm of Genomics England (initially funded by the UK
government) on page 8 who argues that better genetic data can
help patients identify the particular variation of a disease, such as
cancer, they are afflicted with, which should in turn enable them to
get more appropriate, targeted treatment much earlier than was
previously possible. This should reduce the lifetime cost of the
treatment, which in the longer run is beneficial for payers. But at
best, this feels like we are the end of the beginning and certainly
not at the beginning of the end in the quest to balance insatiable
demand for healthcare solutions and the rising costs associated
with it.
3
Fortnightly Thoughts
Issue 70
Six charts to nurse
Almost unparalleled pricing power
Dominant demand for labour
YoY growth in pricing (sales/ext. unit growth) of top 200 generics and
top 200 brands (US$) launched pre-2010
10 fastest growing occupations in the US which employ more than
100,000 people, % change in jobs expected between 2012 and 2022
Generics
Branded
Personal care aides
20%
Home health aides
15%
Physical therapist
assistants and aides
10%
Medical secretaries
Health teachers,
postsecondary
5%
Nurse practitioners
0%
Dental hygienists
Market research analysts,
marketing specialists
-5%
Cement masons, concrete
and terrazzo workers
Misc. health technologists
and technicians
5%
10%
15%
20%
25%
30%
Source: BLS.
Growth everywhere
The State of affairs
Average consumption of different drugs across OECD countries,
defined daily dosage per 1,000 people
Expenditure on health by type of financing, 2011
2000
Private out-of-pocket
2011
Private insurance
General Government
35%
40%
45%
Social Security
Other
Mexico
0%
Source: IMS Health, Goldman Sachs Global Investment Research.
China
Q3 2013
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Q2 2012
Q1 2012
Q4 2011
Q3 2011
Q2 2011
Q1 2011
Q4 2010
-10%
50%
100%
400
90%
350
80%
300
70%
60%
250
50%
200
40%
150
30%
100
20%
10%
50
Source: OECD.
India
Russia
Brazil
S.Korea
Spain
Switz.
Italy
Finland
Sweden
Japan
US
UK
Norway
Antidepressants
Denmark
Antidiabetics
Germany
Anticholesterols
N.Zealand
Hypertension
France
Netherlands
0%
0
Source: OECD, World Bank.
Booming boomers
Average annual expenditure on healthcare by age and as a % of total
after tax income, US
Health insurance
Medical services
Drugs
Medical supplies
CAT scans per 1,000 population, 2011 (or nearest year)
300
As a % of income, RHS
$5,500
More checking
16%
$5,000
14%
250
$4,500
12%
$4,000
$3,500
200
10%
150
$3,000
8%
$2,500
6%
$2,000
$1,500
4%
$1,000
100
50
2%
$500
0
$0
0%
Under 25
years
25-34 years
35-44 years
45-54 years
55-64 years
Source: BEA.
Goldman Sachs Global Investment Research
65-74 years 75 years and
older
Canada
France
Germany
CAT exams per 1000 population (2011 or nearest year)
United States
OECD average
Source: OECD.
4
Fortnightly Thoughts
Issue 70
Change is the only constant
The only constant in the ever-changing world of pharma R&D is
innovation (admittedly less productive at times than others). But, we
would suggest that identifying future dominance and /or early
movers represents a significant investment opportunity. Roche’s EV
has risen from c.US$60 bn in early 2001 to c.US$265 bn today
driven in large parts by its leading position in the global cancer
market (c.30% global market share). Novo Nordisk has been the
best performing large-cap pharma stock since 2000, returning a
25% annualised TSR, driven by its dominance of the global insulin
market, while the last 20-30 years have seen significant advances
in the treatment options of patients, with several diseases including
high cholesterol, blood pressure, asthma/ COPD, HIV, cancer etc.,
becoming manageable chronic conditions. As an example, in the
1990s (pre the introduction of Gleevec, Herceptin, Rituxan etc.)
overall survival for patients with various types of cancer was
measured in months. Today, if diagnosed early on, these have a
limited impact on life expectancy. Admittedly much can still be
done for several other cancer types and recent data from
immunotherapy agents appear very promising in this regard (see
write-up from our US pharma analyst Jami Rubin on the potential
for cancer immunotherapy agents).
Given the importance of identifying first movers/ability to dominate
certain therapeutic areas with high unmet medical needs, we try to
identify two therapeutic areas (Alzheimer’s and heart failure) and
three technologies (RNAi, cellular-based therapies for cancer/
antibody drug conjugates and oral proteins) which if successful
could prove to be happy hunting grounds for risk-friendly investors.
Change in number of deaths (between 2000 and 2010)
80%
68%
60%
Breast cancer
40%
Prostate cancer
20%
Heart disease
Our broader understanding of the underlying biology behind the
incidence of Alzheimer’s disease has improved significantly over
the last few years, albeit off a very low base, and on a relative basis
is still pretty elementary. This, combined with past failures, means
that investor expectations are justifiably low. However, with recent
research providing an ability to diagnose patients much earlier on in
the disease progression and encouraging data in patients with
milder disease we believe there may be some light at the end of the
tunnel. If successful, the current late-stage pipeline options could
meaningfully change the treatment paradigm for at least a sub-set
of the Alzheimer’s patient (by helping slow the progression of the
disease as opposed to providing short-term symptomatic relief).
There are two approaches being evaluated by three companies in
late-stage development – the amyloid-β antibody hypothesis and
the β-secretase inhibitors (BACE) hypothesis. On the amyloid-β
antibody hypothesis, Eli Lilly (Sell; US$59.4, covered by Jami
Rubin) has ongoing Phase III trials evaluating solanezumab (data
expected in 2016/17) and Roche (CL Buy, SFr264.5, Keyur Parekh)
have two assets in mid-late stage development, gantenerumab (in
Phase II/III studies) and crenezumab (Phase II data expected mid2014). Merck & Co (Neutral, US$56.9, Jami Rubin) is evaluating
the use of its BACE inhibitor (MK 8931) in a phase III study, which
will report data in 2017/18. If successful, Alzheimer’s could be one
of the biggest commercial opportunities this industry has ever seen
(US$50-100 bn).
Number of people with dementia worldwide (2010-50), original
(2009) and updated (2013)
140
135 mn
115 mn
Population with dementia (millions)
Our European Pharma analysts discuss
emerging therapeutic areas
105
76 mn
70
66 mn
2013:
44mn
35
33 mn
0
2010
2030
Original
Stroke
0%
-2%
-8%
-20%
HIV
-16%
-23%
Alzheimer's
Disease
-40%
-42%
-60%
Source: Alzheimer's Association.
Alzheimer’s disease: A disease, who’s total societal cost is
estimated (Alzheimer's Disease International) at c.US$600 bn (1%
of world GDP), impacting c.44/5 mn patients globally/US (2050E
135/16 mn). In 2013, the direct costs of caring for those with
Alzheimer’s in America will total an estimated US$203 bn, including
US$142 bn in costs to Medicare/ Medicaid. Net net, the burden of
this disease is not only huge, but also increasing and current
treatment options (Aricept, Exelon, Razadyne, Cognex, Namenda)
are sub-optimal at best. As Alzheimer’s progresses, brain cells die
and connections among cells are lost, causing cognitive symptoms
to worsen. While current medications cannot stop the damage
Alzheimer’s causes to brain cells, they may help lessen or stabilize
symptoms for a limited time (6-12 months) by affecting certain
chemicals involved in carrying messages among the brain's nerve
cells.
Goldman Sachs Global Investment Research
2050
Updated
Source: Alzheimer's Disease international - The global voice on dementia.
Heart failure (HF): Arises when the heart cannot pump enough
blood to meet the body’s needs. It is estimated (WHO) that over 23
mn people worldwide suffer from HF and the prevalence rate is
expected to increase with an ageing population and rising risks
from co-morbidities, such as obesity, hypertension, and coronary
artery disease. Despite significant advances in therapeutic options
in the past decades, HF remains a life-threatening disease with an
annual mortality rate of 10%, on par with many types of cancer,
indicating significant unmet medical needs for many patients. The
current treatment paradigm for chronic heart failure includes a
combination of diuretics, ACE inhibitors, angiotensin-receptor
blockers (ARB), mineralocorticoid receptor antagonists (MRAs),
and beta-blockers. For acute heart failure, inotropes are also added
to enhance the ability of the heart to pump blood. Most of these
drugs were approved in 1990s or even earlier, and innovation in
this area has been relatively quiet in the past decade. However,
with better understanding of the underlying disease, we may have
just entered a new era of drug discovery in HF. The market
opportunity for new therapies could be US$5-10 bn+ given the
relatively high unmet medical needs.
5
Fortnightly Thoughts
We highlight several pipeline drugs that may improve the current
standard of care in HF: (1) Novartis’ serelaxin, a form of a naturally
occurring hormone (human relaxin-2), which helps pregnant women
to cope with the additional burden on the cardiovascular system by
increasing blood output from the heart and blood flow in the kidney.
Data from a late stage clinical trial suggest serelaxin could improve
short-term symptoms of acute heart failure patients after
hospitalisation, and may also reduce the mortality risk. (2)
Novartis’s LCZ696, a first-in-class combination drug of two active
ingredients, its block buster drug Diovan and a novel neprilysin
inhibitor AHU-377. The drug has the potential to restore the natural
neuro-hormonal balance in HF patients. (3) Bayer’s BAY 94-8862,
a new generation MRA that offers more specificity and a better
safety profile. (4) Amgen’s AMG 423, a novel stimulator of the
activity of heart muscle. The drug has shown some signs of clinical
benefit in early-stage clinical trials. (5) Stem cell therapies, e.g.
MyoCell from Bioheart that uses a patient’s own muscle stem cells
to repair heart muscle.
The re-birth of RNAi: Our DNA is a collection of genetic recipes to
make proteins, which are the makeup of our body. While most
proteins are important for our day-to-day function, sometimes the
genetic recipes are faulty and become disease-causing proteins.
RNA interference (RNAi), also known as gene silencing, is a novel
technology where ‘intercept messengers’ are inserted into an organ
or tissue and stop disease-causing proteins from being made.
Because RNAi targets a specific gene, it is theoretically possible to
create a drug that is highly specific to a disease, target any organ,
with a low side effect profile. Secondly, the ability for RNAi to enter
tissues directly means that it can target a broader range of
diseases than the traditional “white pill” and antibody drugs that
often can only act on the surface of tissues.
There was an early wave of interest in RNAi technology in the late
2000s, with expectations that it would revolutionise drug treatment
and reduce the average time it would take to get a drug to market.
This was further fuelled by the Nobel Prize award to Andrew Fire
and Craig Mello for their discovery of RNAi in 2006. Over the next
few years, several major deals/partnerships were forged, including
the Merck & Co acquisition of Sirna (US$1.1 bn, 2006), and
Roche’s acquisition of Mirus Bio (US$125 mn, 2008). However,
several major setbacks (Allergan, Pfizer, Tekmira etc.) beset the
first generation of RNAi therapeutics as researchers realised that
drug delivery to organs was more complex than initially thought,
and some first generation therapeutics showed undesired side
effects such as switching off genes that looked similar to the target
gene, and undesired activation of the body’s immune system.
Given these disappointments, large-cap pharma’s have in most part
chosen to exit this area, with both Merck and Roche divesting their
originally acquired assets and significantly reducing their R&D
efforts in this space.
However, more recently, AstraZeneca (AZN) and Sanofi (SNY)
have upped their interest in this technology. AZN agreed with
Moderna Therapeutics to develop messenger RNA therapeutics in
cardiometabolic diseases and cancer, and SNY acquired a
US$700 mn stake in Alnylam driven by renewed interest in the new
refined RNAi therapeutics. Key players now include Alnylam, ISIS,
Opko Health, Santaris Pharma, and Arrowhead Research. These
companies have focused their efforts on making RNAi more
specific to the target gene, improving the drug delivery systems and
reducing the impact to the immune system in the hope that that
these treatments can target more difficult to access organs and
have a cleaner side effect profile. This allows RNAi therapeutics to
be developed for a wider range of diseases, including cancers, viral
infection, autoimmune and neurodegenerative diseases.
Goldman Sachs Global Investment Research
Issue 70
Cancer approaches beyond immunotherapy: In addition to the
interesting developments in the cancer immunotherapy field, we
believe several other approaches are very exciting opportunities
including cellular based therapy (CAR-T) and antibody drug
conjugates (ADC) which could change the way we think about
cancer treatment.
Cellular based therapy for cancer: New advances in cellular
based therapies have hinted at a potential breakthrough for some
intractable forms of blood cancer. In short, cellular-based therapy
for cancer uses the patient’s own T-cells (immune effector cells) to
actively target and eradicate their cancer. The process involves
harvesting a patient’s own cells and inserting new genes that allow
them to home in on cancer cells. Once these modified cells are
reintroduced into the patient the body is able to mount an effective
immune response against the cancer. While stimulation of the
immune system leads to some severe side effects, this therapy has
yielded complete and durable remissions in some patients.
The technology underlying this cellular therapy is known as CAR-T
(chimeric antigen receptor T-cells). Essentially, the technology
builds upon the experience of using monoclonal antibodies to
specifically target antigens on the surface of cancer cells. This is
much like the effect that Rituxan, which specifically targets a
cellular marker on B-cells (CD20) to deplete the body of cancerous
cells. These antibodies, however, rely on other effector cells to
carry out tumour cell killing and are unable to fully mobilise or
amplify the body’s immune response. CARs overcome this
limitation via the modified T-cells which possess the antibody-like
capability of specifically binding to cancer cells, but also bring the
direct killing effects of T-cells. These T-cells remain active and can
destroy a greater number of cancer cells in addition to having the
ability to further amplify the immune response.
Several recent studies have indicated dramatic efficacy results,
including complete and durable remissions in some patients. The
University of Pennsylvania, in collaboration with Novartis recently
presented data showing that a large subset of blood cancer
patients treated with CAR-T therapy achieved remission. Memorial
Sloan Kettering Cancer Center recently reported similar results in
its study of modified T-cells in patients with advanced leukaemia.
While enrolment was relatively small, 88% of patients achieved a
complete response, compared to the 30% chance of achieving a
complete response for patients receiving standard chemotherapy.
While the initial efficacy benefits of the CAR approach have yielded
encouraging results, there are still many technical challenges. First
is the management of the often severe and potentially life
threatening side effects that come with stimulation of the immune
system. Researchers are currently working to create a treatment
protocol for these side effects in addition to attempting to predict
which patients are likely to suffer from these effects. There are
some practical hurdles as well (time to harvest, process and reintroduce, impact of chemotherapy on T-cells etc). To circumvent
these hurdles, several start-up companies and research groups
have proposed using T-cells from donors that have been further
engineered to properly function in transplant recipients.
Antibody drug conjugates (ADCs): ADCs are a new class of
highly potent biopharmaceutical drugs designed as a targeted
therapy for the treatment cancer. ADCs are complex molecules
composed of an antibody linked via a stable, chemical, linker with
labile bonds, to a biological active cytotoxic (anticancer) payload or
drug. By combining the unique targeting capabilities of monoclonal
antibodies with the cancer-killing ability of cytotoxic drugs, antibodydrug conjugates allow sensitive discrimination between healthy and
diseased tissue. This means that, in contrast to traditional
chemotherapeutic agents, antibody-drug conjugates target and
attack the cancer cell so that healthy cells are less severely
6
Fortnightly Thoughts
affected. We believe Roche and Seattle Genetics are leading the
field on ADC’s with >20 programmes currently in clinical and preclinical development across multiple tumour types.
Oral Proteins/ peptides: Historically, oral dosing of proteins has
been an enigma, with several failed attempts thus far. However,
two recent events have reignited interest in this field with Novo
Nordisk attempting an oral version of its injectable GLP-1 drug
(semaglutide), with positive early stage data leading to Novo
initiating a phase II study (data expected 2015). While clinically very
exciting, the commercial uptake of the GLP-1 class in treatment of
type II diabetes has been hindered in part by their injectable route
of administration and consequently, we believe that if it was
possible to create an oral version of GLP-1, it could lead to
significantly higher penetration and greater market share (5x-10x
the current GLP-1 penetration).
In a similar vein, Roche has announced its decision to in-license an
oral version of octreotide acetate (a peptide) from Chiasma (based
on its proprietary TPE™ System, TPE is an acronym for "Transient
Permeability Enhancer"). The TPE enables oral delivery of
macromolecules (up to 20 kDa in size) and poorly-absorbed small
molecules through the intestine wall into the systemic circulation.
Goldman Sachs Global Investment Research
Issue 70
With the use of the TPE System certain currently available
injectable drugs could be switched to oral formulations and
potentially expanding the market for these drugs. Octreotide is
currently sold for use in several diseases including acromegly and
some neuro-endocrine tumours.
While certainly not for the faint hearted, we believe the above
therapeutic/ technology break-through could provide meaningfully
outsized returns if successful. Change is indeed a constant, but
identifying it early could lead to meaningful investing opportunities.
Keyur Parekh / Steve Chesney / Eleanor Fung / Mick
Readey
European Pharma analysts
email:
Tel:
[email protected] / [email protected] / [email protected]
/ [email protected]
Goldman Sachs International
+44-20-7552-9939 / +44-20-7552-9371 / +44-20-7774-6518/ +44-207552-3714
7
Fortnightly Thoughts
Issue 70
Interview with...Sir John Chisholm
Sir John Chisholm is the Executive Chairman of Genomics England, a company set up by the
Department of Health in the UK to deliver the ‘100,000 Genome Project’ under which 100,000
whole genomes from patients with genomically important diseases will be sequenced over the
next four years. He also serves as the Chair of Nesta, an independent charity that promotes
innovation in the UK and has previously served as the Chairman of QinetiQ Group.
Hugo Scott-Gall: What is
genomics and what does it mean
for healthcare?
Sir John Chisholm: Let’s start with
the genome. A human genome
consists of about 3.3 billion base
pairs of DNA which together code
everything that human cells do.
And so, it was thought that when
a human genome is decoded, a
fantastic cornucopia of insights
would emerge. That gave birth to
the Human Genome Project which
sequenced a human genome for the first time at the turn of the
century at a total cost of about US$3 bn. But biological processes
which make us what we are today, having evolved with the earth for
over 4 bn years, turned out to be fearsomely complex and difficult
to analyse. Instances where a single gene codes for a specific
syndrome were found to be relatively few, with the vast majority of
human syndromes actually involving simultaneous activities of
multiple genes. Furthermore, contrary to previous belief that
proteins were perhaps the most important in cell biology, given that
they are the molecular vehicles which dictate how disease paths
work, it was realized that the regulation of protein formation is at
least as important as the proteins themselves.
Since then, through progressive improvements in sequencing
capabilities, we have moved from the first-generation sequences of
the Human Genome Project to much more advanced secondgeneration sequencers that we deal with today. Consequently, the
cost of sequencing has fallen dramatically at a pace even faster
than Moore’s law suggests.
With the sequencing cost of a whole human genome reaching
below £5,000 in 2012, it became feasible to conceive of a
large-scale sequencing project and this is when we kicked off the
‘100,000 Genome Project’ in the UK. The Prime Minister launched
it at the end of 2012 and Genomics England got going by mid-2013.
Given the complexity of how genes work together, correlating them
with specific phenotypes requires a study of a large sample number
of patients to successfully identify combinations and unique
characteristics. Our project, with a goal of 100,000 genomes, is two
orders of magnitude more than any single collection that's been
attempted thus far. It is a very bold step which can radically change
the way medicine is practiced.
Today, diagnosis relies on the expertise of the individual clinicians,
but this project will help healthcare transform, putting highly
analytical, data-driven information in the hands of clinicians so that
the treatments that patients get are based on a much more precise
diagnosis that stems from an acute understanding of the condition
that they are afflicted with.
It’s difficult to say precisely how long it will take to develop the datadriven industry that will be able to deliver this, but as healthcare
steadily becomes more data-driven, different skills will be required
from participants in the healthcare chain compared to what has
been the case historically.
Goldman Sachs Global Investment Research
Also, if treatments can be prescribed for the precise syndrome of
an individual, the opportunity for a single global mega-drug which
does almost everything is reduced. And so, it is likely that many
more specific molecules will be developed, each of which may have
a much smaller market of their own. It’s also possible to imagine a
situation in the future in which a precise molecule may be designed
through some automatic process, based on the molecular diagnosis
of a patient. While that's science fiction at the moment, it is the
direction in which the industry is headed.
It’s also possible to imagine a situation in
the future in which a precise molecule may be
designed through some automatic process,
based on the molecular diagnosis of a
patient. While that's science fiction at the
moment, it is the direction in which the
industry is headed.
Hugo Scott-Gall: What are the big gating factors and challenges
that you face in your field?
Sir John Chisholm: What we are doing is still pretty much at the
edge of science. The phenomenal complexity of the biological
systems and the technological difficulties of sequencing certainly
pose a significant challenge. But, while the sequencing machines
are not yet perfect, they will definitely get better as we progress in
the project. However, an even bigger challenge is that even after
getting a genome that is 99.5% or 99.9% accurate and linking it to
the clinical phenotypic data of the patient, translating and decoding
the data into actionable treatments for individual patients is still at
or even beyond the edge of science at the moment. To give you
some context, of the three million variants that all of us have from a
standard genome, we typically understand only 15,000 as of now.
This is why projects like ours are important steps through which we
will steadily discover the remaining unexplored regions of this
science.
Hugo Scott-Gall: The benefits of this will be tremendous...
Sir John Chisholm: Absolutely. Some people estimate, for example,
that just 30% of cancer treatments offered currently are actually
relevant to the precise presentation of an individual’s cancer. And
we now know that every cancer is different. There is a huge loss of
efficiency which the molecular diagnosis treatment can help
overcome by providing an exact understanding of the mutations
that causes the cancer in the body. Once the disease is understood
that precisely, doctors will be able to go through the list of non-toxic
molecules available and choose the one which has the right
characteristics to deal with that particular mutation. This opens up a
new set of possibilities because we may find that certain products
may be relevant for syndromes for which they were previously
never considered appropriate. Going down this route will make it
possible, for instance, to treat a patient suffering from ovarian
8
Fortnightly Thoughts
cancer with a molecule that has actually been developed for breast
cancer.
Hugo Scott-Gall: Will the benefits apply to rare diseases as well?
Sir John Chisholm: The impact on the treatment of cancer and rare
diseases will be slightly different. As we sequence more wholegenomes of cancer patients, it is likely that each variation of cancer
will become a small sub-type of the disease. So, instead of just
knowing that they have melanoma, people will be able to identify
that they have melanoma with BRAF v600e mutation, for example,
and get a different treatment appropriately. For rare diseases, we
will be able to define the disease itself better. Instead of thinking of
it as a general developmental disorder which is very difficult to
treat, if we are able to identify the precise genetic cause of the
problem, we will be able to target it better through specific gene
therapy or some sort of protein replacement.
The health economics of treating rare diseases is very attractive,
particularly if the patient is young and with a huge part of their
productive life ahead of him or her. Rare Mendelian diseases, i.e.,
diseases caused by inherited mutations of the genome, have
mostly proved in the past to be extremely difficult to deal with. What
decoding the genome gives us the opportunity to do is to conceive
of ways in which you might be able to treat rare diseases which are
today totally untreatable.
How society deals with the fact that it will be possible to discover
mutations in individuals that predict future healthcare expenses will
be an important ethical question and is definitely an issue for
society to grapple with. But that is a consequence of being able to
discover such diseases now and having the possibilities of dealing
with these.
Hugo Scott-Gall: Which countries are making the most progress in
the field? Also, is the world joined up in its efforts to develop
genomics further?
Sir John Chisholm: There are a lot of global joined-up endeavours
in which the scientific community is seeking to learn from each
other and is working towards common standards so that the tools
which are being developed in one place can readily be adopted
elsewhere. So at one level, the world is quite well joined up.
However, in order to make a widespread adoption of genomics
practical, genomicists need to operate with national health systems
which tend to be rather more idiosyncratic, and in most cases,
highly fragmented.
In this context, the UK is particularly well placed to take a lead in
this technology, not only because we have developed a very strong
scientific understanding of genomics and its clinical consequences,
but also because we have an integrated single payer health
system. These two things don't co-exist anywhere else in the world
at the scale we have, and this was the key reason why David
Cameron could push for the UK to become a leader in this field.
For instance, unlike the UK, the US doesn’t have just one payer
that can decide to generate the samples and the data that is
required to feed a project like ours. Being an insurance-based
health system which is very fragmented, getting together a patient
community of the size and characteristics that are required for a
programme like ours becomes very difficult to do in the US. The
Goldman Sachs Global Investment Research
Issue 70
same is true for China which is reflected in the fact that they have
only been able to sequence 15,000 whole genomes thus far. So,
while some other smaller countries, a number of which are in the
Persian Gulf, have recently announced similar projects, there might
be considerable work to be done in drawing appropriate data from
their health system.
Hugo Scott-Gall: How will the privacy risks be addressed with
regard to the data that will be collected for this project?
Sir John Chisholm: We ensure two things are true in order to
manage such risks in our project. First, our project is based on the
consent of all the participants. We explain to all patients exactly
what we are going to do with the samples and data they provide
and how it will be the subject of considerable research by many
academic, clinical and industrial bodies. We also clarify that the
outcome may not benefit them specifically but instead form a key
part of the large dataset from which insights will be gathered, that
together are likely to benefit the broad patient community. So, only
patients providing us with an informed consent form a part of this
project.
Secondly, we commit to the anonymization of the data so that
nothing can be traced back to an individual easily. All the collected
data is retained within a National Health Service firewall so that
only those people who have satisfied us that their enquiries are
legitimate will be let behind the firewall to do specific studies and
have access to the data. Users will be able to pay for access to the
anonymized dataset but will not be able to take the data away with
them.
Hugo Scott-Gall: From a broader point of view, what role can
governments play in sparking and fostering innovation, particularly
in fields that require a significant amount of risk capital with very
long-term paybacks?
Sir John Chisholm: Governments certainly have a big role to play.
In fact, many of the most radical economic changes in the last 300
years or so have been driven initially by non-economic actors – be
it philanthropy, governments or asset bubbles. In order to get a
profoundly new technology into the market, the first investors are
very unlikely to generate significant returns. Take the rail networks
or the internet, for example. While those that founded them did not
make a lot of money themselves, they provided an infrastructure
from which huge wealth was ultimately generated. And investing in
profoundly new infrastructure like these is indeed one of the key
roles of the government.
It's impossible to know at the outset what products and services will
ultimately come from such an innovation, but, by providing that
infrastructure, governments can give the market economy an
opportunity to exploit it. That is what is happening with genomics
too; we're providing an infrastructure which is our data set. We can't
predict exactly what products and services will emerge from it and
when, but we know for sure that once mined, the tremendous data
that a genome holds about biological activity will profoundly affect
humanity. It's a very smart idea for a country to be the first to
generate an economic space for the market to exploit.
9
Fortnightly Thoughts
Issue 70
Genomics: Changing pharma
Isaac Ro, our US Life Sciences analyst,
seeks the potential in genomics
The cost of sequencing a human genome has declined at an
extraordinary pace over the last seven years, more than 1,000-fold
thanks to the advent of next-generation DNA sequencing (NGS).
An experiment that was once a multi-year process requiring
hundreds of dedicated scientists, dozens of instruments, and
millions of dollars in funding can now be done by a single person in
just days with a variable cost of US$1,000 using Illumina's (ILMN)
latest technology. This type of performance breakthrough has
shattered the famous Moore's Law in semiconductors and ushered
in a new era of scientific discovery.
50k human genomes had been sequenced cumulatively by the end
of 2013. Looking forward, just one of ILMN's HiSeq X Ten
installations will be capable of generating 18k genomes per year.
We expect volumes to be driven by large research labs (i.e.: The
Broad Institute at Harvard/MIT), drug companies (REGN, AMGN
have both announced plans), and new commercial research labs
(i.e.: Human Longevity Inc, a privately held commercial lab headed
by Craig Venter).
The Broad Institute expects to more than triple output in 2014
Data output measured by number of terabases
2,500
2,064
2,000
Rather than looking at highly isolated portions of the genetic code
(usually a fraction of 1%), scientists can now look at a person's
entire genome in a snapshot and do so repeatedly over time as
mutations occur and change. ILMN's dramatically less expensive/
faster technology thus enables scientists to take a true "open
hypothesis" based approach to genetics, rather than aiming for "hot
spots" in the genome and hoping to find key mutations. A practical
analogy: if you drop a coin in the dark, you are more apt to find it
using a floodlight than a flashlight. With this in mind, we consider
the potential for NGS to power a wave of disruption in the
pharmaceutical industry by redefining the way in which patients are
matched with drugs.
Did you know that...?
The first human genome took 13 years and about US$1 bn to
sequence? Today, it takes days at a cost closer to US$1,000
Pharma: A near term beneficiary of NGS
Near term, we anticipate the pharma industry, primarily in the field
of cancer, to be the greatest beneficiary of the democratization and
explosion of genomic data. A growing body of work has illustrated
that cancer is a disease that must be identified and treated
according to its genetic underpinnings, which can only be
elucidated using NGS. Cancer has historically been characterized
by its tissue of origin (lung, breast, prostate) but the scientific
literature increasingly shows that many cancers are better defined
by the genetic pathways or mutations that cause them. In reality,
the tissue of origin for a given cancer is often the by-product, not
the cause, of disease. At the same time, a significant percentage of
first line cancer therapies are ineffective and carry adverse side
effects. By using NGS, physicians can identify the genetic signature
of a patient's cancer and use that information to make more precise
treatment decisions.
This has the combined benefit of improving patient outcomes while
also reducing the use of drugs that are known to be ineffective
against certain mutations. The implications here could be massive,
both for biopharma R&D programmes (where NGS can improve the
likelihood of success in the drug development process) and for
payers (where significant amounts of wasteful spending on
ineffective drugs can be reduced).
That said, we believe that NGS still faces two key bottlenecks
before it can take its place as an everyday tool in modern medicine:
bioinformatics and regulation.
Bioinformatics and Big Data; a potential bottleneck
We anticipate explosive growth in the amount of genomic data that
will be generated over the next few years. For reference, less than
Goldman Sachs Global Investment Research
1,500
1,000
660
500
303
362
154
23
0
2009
2010
2011
2012
2013
2014e
Source: The Broad Institute.
At the same time, the data generated by NGS is huge and lacks
standards. Today, an average human genome file is 65GB in size.
In addition, no software standards yet exist to define what
constitutes a properly formatted and high quality human genome. In
fact, the vast majority of NGS software tools used today have been
developed in academic labs as "homebrew" solutions which we do
not believe will scale over time as commercial products. That said,
NGS is here to stay and Pandora's Box has already been opened in
the clinical setting.
As a result, we see a rapidly emerging need for highly scalable
interpretive bioinformatics tools. As these tools emerge, we see a
rapidly emerging shift in the NGS value chain toward software to
help process the vast amounts of data that could pose a
simultaneous threat and opportunity to current stakeholders. The
good news is that all of the key players recognize the need for
industry standards. Companies including Illumina, Google, Merck &
Co, and the New York Genome Center have partnered in the
Global Alliance for Genomics and Health – an organization
dedicated to standards, policies, and technology to improve human
health. We believe that alliances and efforts such as these are
likely to result in the formation of genomic industry standards.
In the meantime, a lack of standards has led pharma companies to
become creative in obtaining relevant genomics data to accelerate
the discovery and development of novel therapeutics (chiefly in the
field of oncology). Partnerships with research labs and clinical
diagnostics companies such as Foundation Medicine (FMI) have
been the primary avenues that pharma has taken to date, although
we see the potential for in-house labs to rapidly emerge as well. For
example, Regeneron (REGN) has partnered with Geisinger Health
in a major human genetics research collaboration, where the two
plan to sequence samples from more than 100,000 patients.
Amgen has taken the in-house approach through its acquisition of
deCODE Genetics. AMGN will utilise deCODE’s previous database
as well as continue sequencing studies in-house.
We believe that partnerships will create a positive feedback loop for
both the academic centres and clinical diagnostics companies as
their databases grow, making them more valuable to both current
10
Fortnightly Thoughts
and future pharma customers. This raises the second key issue as
NGS expands into the clinical setting: who owns the data and how
will this technology be regulated?
Issue 70
FMI has partnered with numerous pharma companies
Press released partnerships between FMI and pharma companies
The regulatory landscape is a work in progress
Company Name
Ticker
Target
Announce Date
The second major hurdle to broader clinical adoption of NGS is an
uncertain regulatory landscape. While the FDA has approved
ILMN’s MiSeqDx instrument for clinical use, it has fallen to
providers of clinical diagnostic tests to choose whether or not to
obtain FDA approval for these diagnostic tests or choose the less
regulated “CLIA waived” lab-developed-test path (not regulated by
the FDA).
Agios Pharma
AGIO
IDH1 or IDH2 enxymes
(cancer metabolism)
Apr 4, 2013
ARIAD Pharma
ARIA
ALK/EGFR inhibitor for
NSCLC
Nov 13, 2012
Array BioPharma
ARRY
Drug treatments
Mar 6, 2012
AZN
(London)
Genomic predictors of
response to drugs
Nov 12, 2012
CELG
Not specified/various
May 17, 2011
CLVS
PARP inhibitors
Aug 6, 2012
4523 (Tokyo)
Clinical trials and drug
development
Oct 9, 2012
N/A
(Private)
Lung Cancer
November 7, 2013
JNJ
Oncology clinical
development
Oct 25, 2011
Memorial Sloan-Kettering
N/A
(Private)
Hematologic cancers
May 2, 2013
Novartis
NOVN
(Zurich)
Not specified/various
Jan 4, 2011 - Jun 7, 2012 Jan 6, 2014
Sanofi
SAN
(Paris)
Biomarkers for drug
candidates
Jan 10, 2012
While this pathway has served as a suitable solution for sequencing
providers offering genetic testing solutions in the field of
reproductive health and oncology, questions have emerged
regarding the nascent but growing field of companion diagnostics
(CDx) based on NGS. For background, CDx are tests are used in
concert with pharmaceuticals to better align patients with
associated therapies. Today the market for CDx is comprised
primarily of first generation offerings targeting specific mutations in
specific genes (KRAS and BRAF mutations for Erbitux and
Zelboraf, and ALK mutations for Xalkori). However, we believe that
over time the market will shift to CDx offerings that utilise NGS to
elucidate a myriad of mutations across multiple gene pathways.
The FDA has yet to clearly define a regulatory pathway for
companion diagnostic tests and associated therapies. Importantly,
lab-developed tests (LDTs) currently present a secondary pathway
by which tests can be developed, and these remain potential
competitors to the official companion diagnostic that is
co-developed with the pharmaceutical company. This potential
competition creates a disincentive for diagnostic companies to
invest.
This lack of clarity subsequently clouds the willingness of insurance
companies to pay for these tests as well. Current billing practices
do not allow payers to discriminate between an LDT and an FDAlabelled CDx. Thus, diagnostic companies that invest in a
companion diagnostic programme may not ultimately see the
rewards.
Finally, these new methods of drug development are based on
genetic pathways, while FDA labelling is based on disease or tumor
location. Thus, ongoing research increasingly identifies potential
drug uses that are not covered by the official FDA label.
We highlight FMI’s ability to match drugs to specific genetic
mutations in tumor cells as evidence of this growing trend. When
this occurs, physicians are often forced to resort to off-label use
given the typically limited lifespan of patients. As scientific
advancements accelerate faster than regulatory pathways, we
expect that payers will be increasingly forced to decide whether or
not to reimburse off-label drug use.
Goldman Sachs Global Investment Research
AstraZeneca
Celgene
Clovis Oncology
Eisai
Friends of Cancer
Research and others
J&J
Source: Company data.
Despite headwinds, long-term outlook is exceedingly positive
Despite these headwinds, we expect NGS technologies to continue
to proliferate in clinical use. Nearly every late-stage cancer
therapeutic today is being developed in conjunction with a
companion test. We expect the interface between pharma
companies and research labs, both private and public, to expand
significantly in the near term. These partnerships should result in
increasingly large genomic databases, which would help expand
the trend of targeted therapies into other therapeutic areas beyond
cancer.
Regarding pharmaceutical companies, we expect blockbuster
first-line therapies to become increasingly rare. Targeted therapies
and companion diagnostics generally serve to limit the TAM of new
drugs, but will likely help to accelerate adoption given improved
efficacy. Whatever the exact financial consequences, it is clear that
development of the next generation of drugs will require strong
integration with NGS technologies
Isaac Ro
US Life Science Tools & Diagnostics analyst
email:
Tel:
[email protected]
+1-212-902-6393
Goldman, Sachs & Co.
11
Fortnightly Thoughts
Issue 70
Interview with... Dr. Peter Bach
Dr. Peter Bach is the Director for Health Policy and Outcomes at Memorial Sloan-Kettering
Cancer Center. His research focuses on healthcare policy, in particular cancer payment,
developing models of alternative reimbursement and coverage policies. He serves on several
national committees and The World Economic Forum’s Global Agenda Council on Health
Technology.
Hugo Scott-Gall: How do you look at
the progress that has been made in
the treatment of cancer?
Peter Bach: Only the most cynical
could discount the meaningful
progress we're making in
therapeutics in cancer. We have not
cured cancer, but we are very, very
slowly driving down the mortality
rate. The Human Genome Project
has led to an understanding of the
mechanisms of disease leading to
the identification of what we call
driver mutations and the understandings of those mechanisms, and
then agents that block those mutations and/or their activities and
we can clearly see substantively better outcomes for patients. I
believe this will serve to accelerate the number of identified types of
mutations and mechanisms from where we are today , at about a
half dozen linked to approved drugs, to twenty or more in the next
three years. So, that's a positive trend and progress that matters.
Hugo Scott-Gall: But this progress comes at a steadily rising price...
Peter Bach: Right. These advances have been accompanied by a
consistent rise in the pricing of therapeutics in oncology. Prices
have risen so rapidly that it is difficult to determine what they are
correlated to. Currently, the justification given as the most important
determinant of pricing for a new cancer drug is the price at which
the previous drug came onto the market, and not how well the new
drug works or how innovative it is. In the past few years, this pricing
trend has spilled over into other specialty diseases such as
rheumatoid arthritis, multiple sclerosis, cystic fibrosis and Hepatitis
C where drug pricing isn’t linked to any reproducible or predictable
notion of value either.
So the lack of price discrimination based on any metric of value,
whether crude or highly specific, is a substantive problem. This has
had implications for health insurance. As the insurance industry
has to increasingly manage high-priced drugs, while also trying to
create more affordable insurance products, the result is that more
of the costs are put on the patient. So we see not only rising
premiums, but also rising co-insurance and co-payments.
This is a worrisome trend, particularly on the patient out of pocket
side. Our system fails when we make scientific progress but then
patients cannot afford to avail themselves of that progress because
they are priced out. For example, the generic drug for breast cancer
Tamoxifen, which has saved more lives from cancer deaths than
most other drugs, has a co-payment attached to it in most plans.
This makes no sense. Studies show women have stopped taking
their Tamoxifen because of the out of pocket costs. Meanwhile, no
woman would overuse the drug because of its side effects, so the
whole idea of using co-payments to give patients ‘skin in the game’
has no role here or with any therapy we have that is substantially
net beneficial.
We can fret about the cost to taxpayers, the financial burden and
indebtedness for future generations and our economic lack of
competitiveness. But the worst manifestation is that whether it is
Goldman Sachs Global Investment Research
tamoxifen or a new expensive drug, if it actually works, or is less
toxic, that's something that took huge investment of dollars, time,
and the good will of research participants, and it shouldn’t be
squandered due to poorly designed insurance products.
Hugo Scott-Gall: How can this pricing dynamic change in the US?
Peter Bach: A quote often attributed to Winston Churchill comes to
mind: "Americans will always do the right thing... but only after they
have exhausted all other possibilities." There are a number of other
possibilities still left on the table, and it will take a while to work
through them. But I foresee one of two scenarios being ultimately
viable.
A drug that really adds value would
therefore naturally garner two things in the
marketplace; a monopoly price and a
universal patient base.
First, I believe we should tie the price of healthcare to its value. If
done correctly, this would reward the producers of value, the
successful pharma companies too, because the drug would be
offered as a core piece of the insurance product. A drug that really
adds value would therefore naturally garner two things in the
marketplace; a monopoly price and a universal patient base.
Insurance would also work in the way it's supposed to - people
don’t have to pay out of pocket to get access to important
treatments. The rationale is similar to car insurance in the US,
where there is zero cost glass coverage, as it is not desirable to
have people driving around with broken windshields, and also
because most glass isn't broken as a result of anyone's fault.
So, in a value-based system, we would pay for drugs according to
their incremental value, but what that calculation looks like is
something no one is even close to figuring out. To be specific, we
could probably figure out what goes into the formula, but we are far
from assigning the coefficients.
Then the flip side is me-too drugs, drugs that are only marginally or
no more beneficial than something else we already have. They
wouldn't be able to get a premium price, which is what happens
today. In fact, we would work very hard to get them to compete with
their me-too counterparts to drive down the price of both. That’s the
way markets are supposed to work.
This will happen in the future. But what I believe is more likely to
occur today will grow out of our putting more risk on providers. The
buzz-word surrounding this trend in healthcare is “risk sharing” or
“risk shifting”. The idea, very much enabled by the Affordable Care
Act, is that providers - let's say cancer providers (hospitals,
doctors), know more about making the tough choices when treating
cancer than anybody else in the system. Therefore, the insurer
offers a fixed amount to the provider to treat the patient and go out
and purchase the required equipment and medicine. The provider
keeps the remainder, which could be the total profit (full risk shift), a
certain portion of the total (buffered risk shift) or even a portion of
12
Fortnightly Thoughts
what was saved (gain share). There are of course numerous subtle
variations, but they all include the same logic that incentivizes the
provider to save on costs.
An obvious drawback to this risk-sharing scenario is that the strong
economic incentives to lower costs may drive doctors to respond
more robustly than hoped and the lack of transparency in the
system makes it impossible to see what treatment patients are
actually receiving. Treatment protocols are usually considered
proprietary when they are institutionalized, and certainly when they
embedded in service contracts with insurance companies of
intermediaries like ‘pathway’ companies. So as someone who is
concerned that incentives could lower the quality of care, I find not
being able to see what treatment approaches are being
standardized worrisome. To avoid a degradation in care quality, we
should be able to see what treatment protocols the doctors have
agreed to follow and see if those are the best protocols we have for
patients with cancer, because if they are not, then we've failed I
think our first criterion, which is making sure patients get the best
scientifically based treatment we have available.
Hugo Scott-Gall: What are the political obstacles to implementing a
value-based pricing model in the US?
Peter Bach: If this question was posed to me three years ago I
would have said pursuing a value-based model is unimaginable in
the US. Even today, there is absolutely no way this can be done
from Capitol Hill without complete buy-in from the industry. I think
the mechanics of it will be difficult, but I think there's been so much
pressure on the industry in recent times that pharmaceutical
companies are going to start working through something.
Historically, the industry has argued that higher prices have to be
charged to compensate for the risks taken and to recoup the cost of
innovation. However, the industry is now facing pressure from its
extremely high prices and more and more questions regarding
whether their developments are incrementally valuable or truly
meet the unmet needs they claim they do.
I do think that there are signs that change is happening. There are
a small number of examples here. For example, in an op-ed written
in the New York Times, we argued that the price of the cancer drug
Zaltrap, developed by Sanofi, relative to a significantly cheaper
peer was too high. That resulted in the halving of the price Zaltrap. I
wasn't surprised that the New York Times ran the op-ed, but I was
flabbergasted that Sanofi lowered its price. It showed that the whole
issue of price is a real source of vulnerability for the industry.
Moreover, the company’s defense of their price was not that they
had created something innovative or better, but rather that they had
gauged their price against what the ambient pricing was in the
cancer drug space. That argument is a lot less compelling, and in
the end it’s tautological too. When Sanofi halved their price
overnight, it sent a signal that a lot of companies could do the same
if prodded.
Hugo Scott-Gall: Does Big Data and technology help with
transparency?
Peter Bach: A few years ago I would have said no, not really, as
Big Data was essentially little data on steroids. However, Big Data
seems to be proving out, as it provides sample size for
Goldman Sachs Global Investment Research
Issue 70
understanding provider level outcomes, which means some day
competition between and payment to providers could be anchored
to outcomes. Within the data arena, the move towards workable
natural language processing is the most exciting. If we can actually
render real information from free text, that changes everything.
We’ve been working with IBM on Watson, and you can see it
working, and that really is a different model. So I predict that in the
near future we will see emerging models of reimbursement indices
linked to the actual quality of the provider. If so, that does an end to
a lot of the transparency challenges we face right now.
Hugo Scott-Gall: What role does genomics play in all this?
Peter Bach: At the population level, I think the interesting thing is
what are the interventions going to be? Identifying a subgroup of
individuals who are at risk of cardiovascular disease and monitoring
their blood pressure to keep cholesterol down and ask them not to
smoke isn’t very valuable. Weren’t they always supposed to do
that? Genomic assessment of cancers is a different story, as that
is already driving therapeutic decision making and targeted drug
development.
Hugo Scott-Gall: Could you share your thoughts on advances that
may be disruptive to existing treatments?
Peter Bach: I'm very excited about immunotherapy, which looks to
treat cancer by activating, in one way or another, a component of
the patient’s immune system. I’m not alone, immunotherapy was
voted “Breakthrough of the year” by Science journal. There’s a
long-running joke that cancer vaccines are the future of cancer
treatment and always will be...we are going to have to change that
joke! Likewise, there is a revolution around understanding the
drivers of mutations and creating mechanisms for targeted
therapies.
If you look at the compounds that have been approved by the FDA
and the ones that are in the early phase trials, I do think that the
revolution around understanding driver mutations and taking those
to mechanisms of action and targeted therapies is going to mean a
lot. However, targeted treatments and immunotherapies are not
cheap. I think Yervoy is around US$120,000 for a Medicare
patient, which is not affordable by any means.
If our understanding of mechanisms of disease continues to
increase, we may see a material change in development timelines
and the historical paradigm of new drugs taking 15 years to
develop, with multiple failures along the way could change. This
means that that the cost of innovation should come down, and then
we should see prices fall and competition increase.
Take the Philadelphia chromosome for instance. It was discovered
in the 1960s, but the first marketed drug based on the mutation,
called Gleevec, was only launched in 2001. That’s 40 years to
produce a solution. But things are changing rapidly. Crizotinib,
which targets the ALK fusion gene, was only in development for
three years before coming to the market, which was about six
years after the gene was discovered. If this shrinking of timelines
continues it will really be a very exciting and clinically complex time
for cancer treatment.
13
Fortnightly Thoughts
Issue 70
Cancer immunotherapy is paradigm changing
Cancer immunotherapy is paradigm-changing
Cancer immunotherapy is potentially the next big wave of
anticancer agents. Given the promise for this exciting new class of
drugs to affect the survival curve, it will likely “disrupt” the way this
insidious disease has been treated. Implications are far reaching
with respect to the treatment paradigm, how these drugs are priced
and paid for, and which therapies and cancer services could be
rendered obsolete (chemo? radiation therapy?). Cancer
immunotherapy has become the dominant story in large cap
pharma with BMY, MRK and Roche (covered by Keyur Parekh) in
the lead, and with numerous trials in late-stage clinical testing.
Harnessing the immune system to fight off cancer cells, rather than
targeting cancer cells, represents a new approach to treating
cancer, and has led to spectacular results. Interest in PD-1/PD-L1
and combination therapies with Yervoy captured the spotlight at
ASCO in June 2013, and we expect data to continue to dazzle at
this year’s ASCO in June 2014.
Initial responses and survival data in some of the most intractable
cancers have been impressive, with the potential for a benefit
across multiple tumor types. Importantly, these agents have
demonstrated the potential for a cure in a subgroup of patients.
Approximately 20% of patients on Yervoy (the first immunotherapy
checkpoint drug to be introduced to the market) for approximately
10 years have been reported to be alive, which is extraordinary
given the high rates of death for late-stage melanoma. Our
projections of US$10-15 bn for lung, renal and melanoma looks to
be conservative with potential uses across multiple tumor types
(hematological, colorectal, head and neck, glioblastoma, etc.),
which could support sales of around US$30 bn.
so that it can attack and kill cancer cells. They are not directly
targeting the cancer cells, but instead are “re-training” the immune
system to kill the cancer cells, potentially providing an immune
memory and durable effect that leads to a sustained response. This
is likely the reason for the impressive durability of responses
reported for a broad range of cancers and the observation that
patients treated with these drugs experience tumor shrinkage (or
tumors not reappearing) even after drug treatment has ended.
There are different types of immunotherapy agents, including
cytokines (IL-2 and IFN-alpha), cancer vaccines (these are not
preventatives, but function to generate an immune response
against cancer cells), adoptive T Cell therapy, and checkpoint
inhibitors (Yervoy, PD-1, PD-L1). The checkpoint inhibitors have
been the main focus of the medical and investor communities, with
recent clinical data showing impressive tumor responses, including
the potential for a cure in a subset of patient. PD-1 inhibitors are
also close to reaching the market, with MRK’s MK-3475 and BMY’s
nivolumab both likely to be FDA approved in late 2014 for
metastatic melanoma and lung cancer, respectively.
Schematic, overall survival curve for single and combo immunooncology drugs
Illustrative, not representative of actual data
100
90
80
combo (nivo + Yervoy)
70
Percent Alive
Jami Rubin, our US Pharma analyst, delves
into the revolutionary potential of
immunotherapy
60
nivo
50
40
Yervoy
30
20
10
Immunotherapy can lead to increased long-term survival for a
subset of patients vs. chemotherapy and targeted therapies that
lead to rapid, but shorter-term survival benefit
Illustrative, not representative of actual data
Source: Ribas A et al, Clin Cancer Res; 18(2) Jan 2012
Immunotherapy agents work differently from traditional
chemotherapy or targeted therapy agents in that it treats the patient
as opposed to the specific tumor. Traditional chemotherapy agents
function by poisoning and killing cancer cells, but in doing so, also
destroys normal healthy cells. Targeted therapies (Avastin, Rituxan,
Zelboraf) block/activate mechanisms within the tumor cell so that it
can no longer by-pass cell death. As a result, targeted therapies
can often selectively kill cancer cells over normal healthy cells.
While this is typically less toxic, cancer cells can often build up
resistance to these agents. Immunotherapy agents function
completely differently. Instead of targeting the cancer cells, they
stimulate, enhance and/or restore a patient’s own immune system
Goldman Sachs Global Investment Research
0
0
0.5
1
1.5
2
2.5
3
3.5
4
Years
Source: ASCO 2013: Walter John Urba, MD, PhD.
Yervoy targets CTLA4, an immune checkpoint that dampens the
body’s immune response early in the activation cascade by
inhibiting T-helper cells (activates immune response) and
stimulating regulatory T-cells (suppresses immune response). By
blocking CTLA4, Yervoy broadly enhances the immune response
and boosts the body’s natural ability to attack tumors, particularly
those that are immunogenic, like metastatic melanoma. However,
excessive immune system activity can cause significant side
effects, such as GI and skin toxicities (e.g. colitis and dermatitis)
although they can be managed with careful dosing and
corticosteroids.
Yervoy became the first checkpoint immunotherapy agent approved
for metastatic melanoma in 2011 and has been shown to improve
survival. PD-1/PD-L1, like BMY’s nivolumab and MRK’s MK-3475,
have generated the most amount of excitement because unlike
CTLA4 which acts upstream in immune activation, PD-1 dampens
activity later in the immune cascade at the time and site of the
inflammatory response, and have shown better responses and less
toxicities than Yervoy. The PD-1 receptor is present more broadly
than CTLA4 and can be found on T-cells, B-cells, and NK cells,
among others. There are multiple additional pathways that can be
exploited for cancer immunotherapy. Currently BMY’s leading
portfolio includes a LAG3 antibody, lirilumab (anti-KIR, which is
partnered with Innate Pharma, covered by Steve Chesney),
Urelumab (anti-CD137) and denenicokin (interleukin 21).
14
Fortnightly Thoughts
Issue 70
Data to date looks impressive
Initial data from cancer immunotherapy drugs, i.e., checkpoint
inhibitors, has been impressive. Initial responses for Yervoy were
mid-single digits to mid-teens, but even more notable is that for
certain patients Yervoy represents a potential cure (10 year survival
rates are 20%). Initial data from BMY’s Nivo, MRK’s MK-3475 and
Roche’s PD-L1 have already shown response rates higher than
that seen with Yervoy. Response rates across lung, melanoma and
renal have been encouraging. And initial overall survival data for
Nivo improved upon the results seen with Yervoy. Nivo had a 43%
2-year survival in advanced melanoma compared to Yervoy data of
25%-30%. We have also seen strong, long-term survival rates in
NSCLC and RCC with Nivo. The lasted data in squamous and nonsquamous NSCLC demonstrated a 1 year survival of 42% and 2
year survival of 24% in patients treated across all doses. We could
potentially see even higher OR rates with the best dose (3 mg)
which is currently in Phase 3 studies.
Sizing the commercial market
The cancer market is expected to be around US$80 bn in the
developed markets and close to US$20 bn in the pharma-emerging
markets, according to IMS. We believe that the market’s
understanding of the size of the immuno-oncology market is still
early in its formation. Our GS pharma team has published an initial
estimate of US$10-15 bn, but this is likely too conservative as it
only includes revenues for lung, renal and melanoma. There is
clearly upside to our forecast from the numerous other tumor types
that are being explored. BMY is currently exploring around 10
tumor types for Nivo, including lung, renal, melanoma, gliobastoma,
triple negative breast, gastric, pancreatic, prostate cancer,
hematological cancers, and hepatocellular cancers.
chemotherapy agents are used today; as a first line treatment
across a diverse range of tumors. If that becomes the case it will
put clear pressure on the sales of some of the current treatment
regimens. Target therapies/chemotherapies such as LLY/Alimta
and ROG/Avastin (used for lung as well as other cancers) may lose
out. Companies and investors are watching as immuno-oncology
agents progress in additional cancer types as their usage may be
wide-spread, disrupting many current cancer drugs and/or targeted
therapies in pharma/biotech pipelines. While there is potential for
combination targeted therapy with a PD-1 antibody, we have yet to
see any clinical data on this, though ROG has started a
combination PDL-1/Avastin study as has BMY. Those companies
that have access to PD-1 molecules, will clearly be advantaged in a
world where immuno-onocolgy is the backbone of cancer
treatment.
Biomarkers
One area of debate in the field remains around the need for PD-L1
biomarkers. There have been studies that looked at PD-L1 positive
vs. negative tumors and have demonstrated that those patients that
have PD-L1 positive tumors have better clinical outcomes (as
measured by overall response rate).
However, while PD-L1 positive tumors show higher response rates
to therapy versus PD-L1 negative tumors, biomarkers remain
unreliable. PD-L1 negative tumors can still respond to treatment,
and therefore we expect patients with PD-L1 negative tumors to be
eligible for treatment. There are clinical trials directed against only
PD-L1 positive tumors and those being run independent of PD-L1
status to help answer the biomarker question – but it remains open
ended to date.
Jami Rubin
Winners and Losers
If the initial data remains promising in later-stage clinical trials,
there will clearly be winners and losers. It is not unrealistic to think
that immuno-oncology agents could be used similarly to how
US Pharma analyst
email:
Tel:
[email protected]
+1-212-357-7536
Goldman, Sachs & Co
PD-1/PD-L1 phase 3 (phase 2) potential registrational studies
Phase Identifier
Tumor type
Treatment line
Comparator
Patients
Est. Primary
Completion Date
3rd line
2nd line
2nd line
2nd line (Yervoy
failures)
1st line
2nd line
1st line
n/a
Taxotere
Taxotere
100
264
574
Feb-14
Aug-14
Nov-14
dacarbazine or carboplatin and paclitaxel
390
May-15
410
822
915
Sep-15
Feb-16
Oct-16
495
Jan-17
780
Mar-18
BMY
2
3
3
NCT01721759
NCT01642004
NCT01673867
Squamous NSCLC
Squamous NSCLC
Non-squamous NSCLC
3
NCT01721746
Metastatic melanoma
3
3
3
NCT01721772
NCT01668784
NCT01844505
Metastatic melanoma
RCC
Metastatic melanoma
3
NCT02041533
Recurrent/Stage IV NSCLC, PD-L1+
1st line
3b/4
NCT02066636
Advanced/Metastatic NSCLC
2nd line
dacarbazine
Afinitor
w and w/o Yervoy
Alimta, Taxol, Paraplatin,
Platinol, or Gemzar
n/a
NCT01866319
NCT01704287
NCT01905657
Metastatic melanoma
Metastatic melanoma
NSCLC, PD-1L+
1st line
2nd line
2nd line
Yervoy
chemotherapy
Taxotere
645
510
920
Jul-14
Mar-15
Sep-15
NCT01846416
NCT02008227
NSCLC, PD-L1+
advanced/metastic NSCLC
1st line
2nd line
n/a
Docetaxel
100
850
May-15
Jun-18
MRK
3
2
2/3
ROG
2
3
Source: clinicaltrials.gov.
Goldman Sachs Global Investment Research
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Fortnightly Thoughts
Issue 70
Interview with...Sir Michael Rawlins
Sir Michael Rawlins is the President of The Royal Society of Medicine in the UK and previously
served a 14-year tenure as Chairman of the National Institute of Health & Clinical Excellence
(NICE). He is also an Emeritus Professor at the University of Newcastle-upon-Tyne.
Hugo Scott-Gall: What is NICE’s
role in the UK health system? And
what is its relationship with
pharmaceutical companies?
Sir Michael Rawlins: NICE is an
independent public body that was
set up in the UK in 1999 in an
attempt to defuse the so-called
postcode lottery of healthcare,
where the availability of
treatments depended upon the
NHS Health Authority area in
which the patient happened to
live. NICE publishes appraisals
and guidelines on drugs and
treatments based primarily on evaluations of efficacy and cost, i.e.
whether or not they represent increased value for money versus
alternatives.
Economic circumstances in the UK have meant that the
government cannot always afford to pay the large sums of money
required or demanded by the pharmaceutical industry. For drugs to
be approved they have to be at a price that's affordable and that
represents value for money to the tax-payer. This means
healthcare systems constantly have to make difficult decisions;
they cannot spend significant amounts of money on one drug for a
small number of people as this disadvantages many others going
without care.
However, that being said, overall only 15% of products are rejected
by NICE, with two-thirds accepted within their full license
indications and the remaining restricted to use in certain subgroups of patients. In one sense, NICE is an extra hurdle in the
process, but necessary in deciding the affordability of a new
treatment relative to the benefits it brings for countries where
healthcare is the responsibility of the state.
NICE also plays an important role in pioneering technology
assessments internationally. European countries such as Germany,
France and Sweden have looked at the approaches that NICE has
taken and are adapting them to their own countries circumstances.
Essentially, all countries face the same problems of meeting
increasing demand with finite, or sometimes diminishing resources.
Hugo Scott-Gall: Who should be in the driving seat of innovation?
Is it private companies for the revenue opportunity or governments
to counter healthcare costs?
Sir Michael Rawlins: There are massive areas of unmet need,
particularly in the neurodegenerative area of diseases such as
Alzheimer’s, Parkinson’s, and Huntington’s, where there is nothing
that changes the course of the disorder. That requires a
combination of private and public money to make discoveries,
create new compounds and develop them into medicines. Publiclyfunded research, including trusts and universities, has played a
very significant part over the years in the discovery process, but it
needs the pharmaceutical industry to develop the products.
However, in some cases, there is market failure as there may not
be any incentives in place for pharma companies to develop new
solutions. For instance, in antimicrobials and antivirals, the
resistance to present-day antibiotics is causing real concern. The
problem is that a pharmaceutical company would not go into
Goldman Sachs Global Investment Research
development because the minute the solution went onto the
market, it would be heavily restricted by healthcare systems around
the world to stop people from developing further resistance.
Nevertheless, there are encouraging signs of collaboration. Recent
examples include the European Union adding some €150 million
into a joint anti-microbial research project with pharma companies
in an effort to get pre-competitive programmes off the ground. Also,
in the US it was announced that the National Institute of Health
(NIH) is partnering with ten biopharmaceutical companies and
contributing US$119 mn and US$111 mn respectively over the
course of five years to focus on a handful of diseases for which
there is currently no cure.
There are massive areas of unmet need,
particularly in the neurodegenerative area of
diseases such as Alzheimer’s, Parkinson’s,
and Huntington’s, where there is nothing that
changes the course of the disorder. That
requires a combination of private and public
money to make discoveries, create new
compounds and develop them into medicines.
Hugo Scott-Gall: Which areas across the healthcare spectrum do
you feel most excited and optimistic about in terms of
breakthroughs? And how do you think about technology and Big
Data in particular?
Sir Michael Rawlins: There is the potential for significant progress
as a result of us knowing more about the biology of diseases. Being
able to identify more targets that are tractable should give a rise in
the quantity of new medicines and lead to improvements in their
safety. This has most widely been true in cancer, but currently most
of the anti-cancer products have served to provide extensions of life
by a few months but have not actually fulfilled their promises of
bringing cures, which is what we want.
Will Big Data make a difference? The answer is yes it certainly is
improving efficiency in the regulatory framework. Presently, the
European Medicines Agency (EMA) has been discussing
introducing adaptive licensing which involves receiving earlier
authorization for certain new drugs and gathering real-time data on
an ongoing basis to evaluate results. Companies are currently
completing Phase 2 studies and are waiting to go onto Phase 3 - a
process which can take over 10 years to complete. However, in the
future if a product finishes Phase 2 and is particularly promising it
could receive conditional authorization.
These types of initiatives are worth pursuing because anything that
reduces the length of time before a drug gets on the market has
two advantages. First, it gives patients an opportunity to benefit
from it; and secondly, if it shortens the period of drug development
it'll reduce the cost.
Hugo Scott-Gall: In publicly funded healthcare systems, what are
the factors apart other than cost that feed into the equation of
approving some treatments?
16
Fortnightly Thoughts
Sir Michael Rawlins: There is a lot of talk, especially in the UK,
about what's been known as value-based pricing - where setting
prices is primarily based on the estimated customer utility rather
than on historical prices or cost of product. This is a tricky subject
as this means different things to different people. It’s a question of
the extent to which you extend the value of a pharmaceutical
product beyond the healthcare system. Should you, for example,
include what economists have called a productivity benefit, i.e.
when people can go back to work rather than be laid off by the
disability or illness. Inevitably, these tend to be political questions
with less than straightforward answers. For example, the
disadvantages of factoring in a productivity component for a country
like the UK is that it isn’t all that compelling when there is a 7%
unemployment rate. A second problem is that in the UK, the
productivity idea would almost certainly be in conflict with the
Equality Act because it inherently creates an advantage for people
who are in employment and disadvantages for those not employed,
particularly the elderly. Any such decision would almost certainly be
stumped at the judicial review.
In other countries too, it would be very difficult for any politician to
reduce the amount of care on the elderly as they’re the ones who
come out and vote. They also account for a big proportion of
consumption in an economy. If we were to take a wider societal
perspective and look at productivity, then yes, the elderly would be
disadvantaged.
So, for most countries, there are two components to look at here –
how constrained is the healthcare system and the extent to which
they want to take the benefits into account. Both are political
decisions which different implications in different countries.
The other issue is that these decisions are not based on analysis
that gives us a straight yes or no answer, and they depend heavily
on the social values very specific to countries. For instance, should
we assess drugs for very rare diseases in the same manner given
that they are always going to be much more expensive than the
drugs for common ones? We can't just translate the social values
we've adopted at NICE and put them into Italy or Spain, let alone
Thailand, Burma or Brazil.
What I think will happen is that the scientific methodologies may
converge in different countries. But it will still be individual countries
that make their decisions depending on their economic
circumstances, depending on their social values, depending on
their political climate. I can understand how troublesome it must be
for companies to have to produce 29 different submissions for each
member state in the European Union.
Hugo Scott-Gall: What is NICE’s and the UK’s influence on global
healthcare systems?
Sir Michael Rawlins: Developing countries are very interested in
health technology assessment because they have to assess
priorities in their healthcare systems too. How much they have to
pay relative to what they get for the money is becoming a very
important component. Our appraisal programme has been easier
for us to export as the UK has a long tradition of evaluation,
Goldman Sachs Global Investment Research
Issue 70
comparative effectiveness research and health economics. In
particular, we appreciate the influence of the York School of Health
Economics, which has worked on the effects of decisions the NHS
has taken on specific services and what they have meant for the
length and quality of life. They track real overall expenditure and
productivity which encourages accountability in the system, but also
predictability for investment decisions.
At NICE, all the members of our
guideline groups are completely independent
of any sort of interest. Of course
manufacturers are entitled to have their say,
but they don't necessarily have their way.
Hugo Scott-Gall: And how about the US, are we likely to see global
protocols?
Sir Michael Rawlins: It is more difficult in the US as many North
American clinical guidelines are over-influenced by sponsorship by
big pharmaceutical companies. This is not just my assessment but
other Americans are talking about it; the editor of the journal,
JAMA, has voiced strong concerns as well. At NICE, all the
members of our guideline groups are completely independent of
any sort of interest. Of course manufacturers are entitled to have
their say, but they don't necessarily have their way.
Hugo Scott-Gall: Apart from drugs, in which other parts of the
healthcare value chain do you see potential for better cost
efficiency?
Sir Michael Rawlins: We shouldn’t forget that approximately 70% of
healthcare costs are from the people the industry employs doctors, nurses, pharmacists and so on. We are not going to make
too many inroads into lowering costs in those areas without having
an impact on the quality of care.
In the UK and the NHS, the gains are going to be made in two
areas. The first is the need to re-engineer services, so that there
are fewer clinics but more concentrated services for an assortment
of trauma, accident and emergency ailments. The second is that
care has to be developed and more integrated across primary and
secondary care. Both of these areas are going to be tricky to
redesign. Re-engineering services is difficult because, for example,
in Bournemouth and Poole, merging hospitals on perfectly sensible
grounds attracted attention from the competition commission.
Integrating primary and secondary healthcare is also going to prove
to be difficult as there are currently separate commissioning
arrangements for both. Primary care is commissioned by the
regional team and the clinical commissioning group commissions
secondary care.
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Fortnightly Thoughts
Issue 70
Making the case for stem cells
Andrea Chong, from our Australian
Healthcare team, explores the potential in
stem cells
Stem cells are the body’s cellular building blocks from which nearly
all other cells are formed. They are important in the repair and
replacement of damaged cells and hold remarkable promise for
many of the world’s most serious diseases. Here, we focus on the
latest milestones achieved by stem cell research and explore a
number of areas where it could be potentially disruptive for current
treatment regimes.
What are stem cells and what makes them special?
Scientists have made great progress in isolating many different
types of stem cells and uncovering how they work, although a lot
remains to be understood. As the body’s basic cellular material,
stem cells are understood to have two distinct properties. First, they
are capable of self-replication. Second, they can develop into a
range of specialised cell types, including bone, blood vessels,
neurons, muscle and cartilage. Recent research has also shown
that they could play a role in improving the function of the
specialised cells around them, and may have anti-inflammatory and
immunosuppressive properties. The possibilities of clinical
applications are seemingly endless.
Current clinical uses of stem cells are still very limited
Despite the attention surrounding their potential, the range of
diseases for which stem cells are currently approved is extremely
limited. In the field of hematology and oncology, doctors have been
using hematopoietic (blood) stem cell transplantation for over 50
years as standard treatment for certain cancers and immune
system disorders such as leukemia and lymphoma. Apart from this,
a number of companies (two in the US, one in Korea, one in
Europe) have been selling stem cells to patients for wound repair,
cartilage repair and bone graft material, but on a small-scale,
bespoke basis only and hence subject to limited regulatory review.
In the US, blood stem cell transplantation is the only FDA approved
use for stem cells. Another recent and related development has
been the rise in popularity of private cord blood banking, which is
the collection and preservation of stem cell-rich umbilical cord blood
for possible later use.
No verdict yet on efficacy; but could be commercially viable
Embryonic stem cells vs. adult stem cells. Scientists have
known about the existence of stem cells for at least a century but it
has only been since the late 1990s, when human embryonic stem
cells were first cultured in the laboratory, that stem cells have been
viewed as a potential form of treatment. However, much of the
discussion on stem cells then was focused on the intense ethical
debate around the destruction of human embryos for stem cell
harvesting. Today, embryonic stem cell research is still conducted
in many parts of the world but is highly regulated. Given the
controversies, future uses in the clinic appear very unlikely. To side
step the ethical issues associated with embryonic stem cells,
scientists are now focused on the potential of adult stem cells.
Although much less potent, adult stem cells, obtained in many
cases from the bone marrow of healthy donors, provide an
accessible alternative to embryonic stem cells.
Emerging signs of commercial viability. A key achievement of
stem cell research in the last decade has been to show that certain
types of adult stem cells in certain types of settings are, at least,
safe for use in the human body – although we do note that patient
Goldman Sachs Global Investment Research
sample sizes have been small to-date (typically less than 100).
Nonetheless, this is an extremely important milestone given
concerns around potential tumour/cancer formation, infection and
immune system rejection.
Related to this is the ability to grow stem cells in large numbers
rapidly and cost-effectively to unlock their “off-the-shelf” commercial
potential. Scientists initially explored the use of the patient’s own
stem cells, termed autologous stem cells, to reduce the chance of
immune system rejection but their commercial viability is limited
because their manufacture is not easily scalable (given the need to
harvest and grow the cells before re-transplanting into the patient).
Instead, scientists have now successfully isolated and identified a
few types of allogeneic stem cells (meaning stem cells originating
from a different person and hence genetically dissimilar), which do
not appear to illicit an immune system response in the recipient. Of
these stem cells, the most promising type appears to be
mesenchymal (meaning connective tissue) stem cells, or MSCs.
MSCs can be extracted from a small number of healthy donors,
usually from the bone marrow, and then significantly expanded and
reproduced for potential use in thousands of patients. Because
MSCs do not require tissue-type matching to the patient, which can
be a time-consuming process, they can also be extremely valuable
for acute/emergency uses.
Publicly traded stem cell companies
Led by Australian stem cell company, Mesoblast (market
capitalisation A$1.9 bn), there are approximately 20 public and
private companies active in stem cell development. Roughly half of
these companies use autologous stem cells and half use allogeneic
stem cells. Many use MSCs. Others use stem cells from fat tissue
(via liposuction), human placenta, or a human fetus. Of these
companies, Mesoblast has the most comprehensive clinical trial
programme with late-stage trials about to commence in heart failure
(funded by Teva Pharmaceuticals) and intervertebral disc repair for
back pain. The company also expects to make a regulatory
submission to the FDA on pediatric graft versus host disease in the
next 12 months, which if successful, could be the first FDAapproved stem cell product available for sale in the US.
Market Capitalisation (US$ mn)
STEM CELL THERAPEUTICS CORP (CA)
RENEURON GROUP PLC (GB)
STEM CELL THERAPEUTICS CORP (CA)
ADVANCED CELL TECHNOLOGY INC (US)
NEOSTEM INC (US)
TIGENIX NV (BE)
CYTORI THERAPEUTICS INC (US)
BIOTIME INC (US)
PLURISTEM THERAPEUTICS INC (IS)
NEURALSTEM INC (US)
ATHERSYS INC (US)
STEMLINE THERAPEUTICS INC (US)
MEDIPOST CO LTD (SK)
OSIRIS INC (US)
MESOBLAST LTD (AU)
$0
$200
$400
$600
$800 $1,000 $1,200 $1,400 $1,600 $1,800
Source: Goldman Sachs Global Investment Research, Bloomberg.
Future disruptive potential?
We highlight three areas where stem cells could be potentially
disruptive for currently available treatments – noting, of course,
that these three examples represent only the tip of the iceberg.
There is a vast body of research exploring stem cells in a range of
other diseases including cerebral palsy, diabetic kidney disease,
multiple sclerosis and blindness.
18
Fortnightly Thoughts
Where can we use stem cells?
Issue 70
mn) makes one of the few commercially-available stem cell
products in the world, although its availability is limited only to
Korea. Its product uses MSCs obtained from umbilical cord blood
and is used to repair cartilage damage in the knee caused by
osteoarthritis. Another company, Belgium-based Tigenix (market
capitalization US$200 mn) has a similar product that is available in
the EU but uses autologous, not allogeneic, stem cells. Its product
was the first cell-based product to be successfully approved in the
EU under its Advanced Medicinal Therapy Programme in 2009.
Australian-based Mesoblast is looking to treat diseases of the
spine. The company recently reported results from a 100 patient
trial in intervertebral disc degeneration showing that an injection of
its stem cells into a damaged intervertebral disc, improved both
back pain and disc stability. If later-stage trials are successful,
Mesoblast could have a commercially available product for back
pain by 2016.
Stroke
Source: Goldman Sachs Global Investment Research.
Cardiovascular diseases
One of the largest opportunities for stem cells is in cardiovascular
diseases, given their large global prevalence in the population.
Mesoblast, together with partner Teva Pharmaceuticals, is about to
commence a large (1,700 patients) Phase III trial investigating the
use of stem cells in heart failure, which is characterised by
weakened heart muscle most likely due to a prior heart attack or
hypertension. Current available treatment for heart failure includes
heart stents, medications, coronary bypass surgery or, in end-stage
cases, heart transplants. In Mesoblast’s trial, stem cells are injected
via catheter into the damaged heart muscle. The stem cells are
designed to release factors to induce blood vessel formation, heart
muscle regeneration and reduce scarring; hence improving heart
function and ultimately, mortality. Previous trials in 45 patients
showed positive signs on both heart muscle strength and mortality
measures.
While a number of animal studies have shown that stem cells can
improve cognitive function after a stroke, the research in human
patients is still in early stages. Stroke is the single largest cause of
adult disability in the world and there are very few treatment options
available to patients. One company at the forefront of stem cell
research in stroke is UK-based Reneuron (market capitalisation
£60 mn) which uses neural stem cells from a fetus that are
genetically engineered and then expanded in culture. All nine
patients in its study demonstrated reductions in neurological
impairment, with most sustaining the improvements in the longer
term. The company plans to commence Phase II trials this year,
subject to regulatory approval.
The next three to four years are exciting ones for the stem cell
industry. In that time, we may have persuasive evidence that
certain types of stem cells could be effective in some medical
applications, and we would be another few steps closer to
uncovering its full clinical potential.
Andrea Chong, CFA
Orthopedic diseases
Australia Healthcare analyst
There is a significant body of research on the use of stem cells in
orthopedic diseases. Currently, there are limited curative options for
these diseases with most treatments targeted at symptomatic relief.
Korean-based company Medipost (market capitalization US$435
email:
Tel:
Goldman Sachs Global Investment Research
[email protected]
+61-3-9679-1126
Goldman Sachs Australia Pty Ltd
19
Fortnightly Thoughts
Issue 70
China: Insurance key for healthcare reform
Our China Healthcare analyst, Wei Du, PhD,
argues that the success of hospital reform
hinges on insurance reform
In just 20 years, China has risen from outside the top 10 healthcare
markets in the world to being the third largest. Rising incomes, an
ageing population and increasing demands for quality care look set
to drive further growth in healthcare spending. However, a
deteriorating dependency ratio, increasing patient awareness and
the prospect of the government assuming a greater share of
spending looks set to increase the focus on the value and quality of
healthcare provision. To meet growing expectations, we believe
that the government will need to provide a market structure that
incentivises the provision of effective, safe and low-cost medical
services. We envisage drug prices, notably branded generics,
continuing to drop, and see insurance reform as increasingly
imminent as all incentives hinge on an efficient payer system.
Insurance reform is key to the success of hospital reform
1. Hospital reform taking centre stage
In 2013, the Third Plenum laid out a more market-based healthcare
reform blueprint, with three major changes: (1) further drug price
control, driven by essential drug lists (EDLs) expansion: (2) “deadministration” of public hospitals, and encouragement of private
investment in the healthcare service sector; and (3) centralised
control of urban/rural medical insurance and its gradual extension
to private hospital coverage. While the overarching relationship of
patient, provider (e.g. hospitals) and payer (e.g. the government,
insurance companies) is a delicate balance, we believe insurance
reform is key to the success of hospital reform.
China’s healthcare reform
Insurance reform is a key limiting step
Insurance reform: Breaking the de-facto Payer-Provider alliance is
key for the welfare of patients
Insurance reform is a key limiting step
• Subject to hospital
prescriptions, little
bargaining power
Patient
Payer
(Insurance
provider)
• Little third-party basis to
argue for payment
• De-facto alliance with
Provider
• Bear most cost risk
• Excluded from defacto Payer-Provider
alliance
Provider
(Hospitals)
• Sole determinant of medical
cost, profitability linked to
higher medical cost on patient
• No incentives to control high
costs
Source: Gao Hua Securities Research, China National Health and Family
Planning Commission.
3. Changing payer and provider relationship to ensure a fair,
efficient healthcare system to ultimately serve patient’s need
We believe that correcting the payer/patient relationship and better
aligning insurance payout schemes with the provision of quality
healthcare services is key to China healthcare reform, and
enhancing China’s social welfare system. We consider the following
as of paramount importance over the next 3-5 years:
• Expansion of insurance coverage to major illnesses and
increasing use of private hospitals.
• Centralised third-party insurance management programme to
achieve cost reduction. Integration of the Urban Basic Medical
Insurance Program (UBMI) and New Rural Cooperative Medical
Scheme (NRCMS) is the first step, and should lead to improved
affordability of healthcare services as well as hospital efficiency.
• Development of a DRG system to standardize medical practice
and minimize redundancy to improve overall service efficiency.
Source: Gao Hua Securities Research, China National Health and Family
Planning Commission.
2. Loopholes in China’s the three “Ps” relationship
The three “Ps” in China are poorly aligned to some extent: (1) with
few private insurance companies in play, payers in China are in the
main a government body whose primary focus is cost. This does
not serve the patients’ best interest in terms of service quality; (2)
as a government entity, China’s payer also aims (in part) to support
service providers, i.e. hospitals, as both are under the supervision
of the Ministry of Health. This can lead to less scrutiny on
physician’s practice, inflated costs owing to a high level of service
redundancy, and limited patient choice or bargaining power.
• Growing commercial private insurance to serve broad needs
helped by broader scope of investment vehicles.
• Insurance payments should shift from a fee-for-service model to
measures based on performance and economic outcomes.
Emerging hospital chains/management group
Ongoing hospital reform will likely create a hospital chain and large
hospital management group in the near to medium term in our view.
With increasing policy support for healthcare service providers, we
see:
• Growing interest in investing in China’s healthcare service sector,
which we expect to offer stable growth and strong cash flow in the
long term, as Chinese patients often pay upfront before seeking
medical treatment.
• Encouragment of private investment in public hospitals, helped by
“de-administration”in China’s public hospitals.
Goldman Sachs Global Investment Research
20
Fortnightly Thoughts
Issue 70
• Changing hospital revenue mix towards services, rather than
relying heavily on drug sales.
Government is taking up a larger role in healthcare expenditure,
thanks to broader insurance coverage
• Improving service efficiency and quality, via sharing resources
among a group of hospitals, and developing proper incentive
schemes to motivate medical practitioners.
Individual, society and government annual healthcare expenditure as %
of total annual healthcare expenditure in China
Government
• Hospital groups/chains, at some point, might serve as major
service entities to cooperate with insurance providers to better
serve the social function.
Society
Individual
100%
90%
80%
25.1%
18.0%
17.9%
18.1%
29.9%
35.6%
24.7%
27.5%
28.6%
30.4%
35.1%
35.9%
34.7%
40.4%
37.5%
35.5%
34.9%
2008
2009
2010
2011
32.6%
33.6%
60%
Number of public and private hospitals (2003 -9M2013)
22.3%
25.6%
70%
Private hospitals are on the rise, taking share from public ones
15.5%
36.2%
39.2%
34.9%
50%
# of private hospitals
# of public hospitals
Private hospital as % of total hospitals
40%
14,000
13,427
50%
44.6%
30%
45%
20%
12,000
10,795
10,000
40%
35%
10%
25%
6,000
59.0%
46.4%
52.2%
49.3%
44.1%
35.7%
21.2%
0%
1980
30%
8,000
42.6%
1990
1995
2000
2005
2006
2007
Source: National Health and Family Planning Commission (NHFPC).
20%
10%
2,000
5%
0%
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Feb-13
Oct-12
Nov-12
Sep-12
Jul-12
Aug-12
Jun-12
Apr-12
May-12
Mar-12
Feb-12
Oct-11
Nov-11
Sep-11
Jul-11
Aug-11
Jun-11
Apr-11
May-11
Mar-11
0
Source: National Health and Family Planning Commission (NHFPC).
Increasing government funding and insurance expansion are
leading to rising demand for service efficiency and quality, and a
regulatory constraint on public hospital expansion offers significant
opportunities for private hospitals in the next 3-5 years.
The number of private hospitals has been growing at an 18%
CAGR (2003-12), reaching 10,795 by the end of September 2013
and accounting for 45% of the 24,222 hospitals in China. However,
the number of beds in private hospitals (2012) is just 10.2% of total
hospital beds, at 0.58 mn vs. 5.14 mn beds in public hospitals.
Independent clinical labs (ICLs) and pharmacies, the next
contenders
With the introduction of more private hospitals and clinics, comes
demand for services such as independent clinical labs (ICLs) and
pharmacy management. Compared with the c.40% penetration rate
of ICLs in the US, China’s ICLs have less than 2% market share.
With ICLs’ expertise, focus and centralisation, we see more
hospitals, private or public, having the incentive to outsource their
clinical lab services to ICLs, to save cost and improve efficiency.
We favour the emerging independent clinical labs (ICLs) as we see
them as able to take a significant share of the testing/diagnostic
businesses from the clinical laboratory departments of hospitals by
offering a wider service portfolio and more cost-effective and timely
diagnostic services to hospitals of all sizes.
With a heightened scrutiny on over-subscription of drugs, and
widespread “zero mark-up” policies for hospitals, to cut their
dependence on drug revenues, China’s healthcare reform is
increasingly tilting towards disease prevention. This drives demand
for diagnostic services, benefiting independent clinical labs (ICLs)
and, to a larger extent, medical devices companies that make
in-vitro diagnostic (IVD) products in our view.
Goldman Sachs Global Investment Research
Evolving market dynamics; stay selective
Despite a cost containment policy, the long-term growth potential of
the sector will remain mid-teens for the next 5-10 years in our view,
driven by favourable demographic trends, economic development,
new product launches and government insurance expansion. The
healthcare service sector should continue its strong momentum,
tapping more private capital with the implementation of more
market-based reform. However, we expect a major shift from pure
EPS growth to core competence to the ability to deliver sustainable
growth, which might be reflected by fruition of R&D pipeline,
abundant capital, and stronger wave for M&A as a driver for growth
in diverse businesses.
A roaring decade continues…
Shenyin Wanguo (SWS) A-share healthcare index
1999-2004 CAGR
2%
2004-2009 CAGR
16%
SWS A-share 300 Index
2009-2014 CAGR
18%
500%
400%
300%
200%
100%
0%
-100%
Dec-99
May-00
Oct-00
Mar-01
Aug-01
Jan-02
Jun-02
Nov-02
Apr-03
Sep-03
Feb-04
Jul-04
Dec-04
May-05
Oct-05
Mar-06
Aug-06
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
15%
4,000
Source: Goldman Sachs Global Investment Research.
Wei Du, Ph.D
China Healthcare analyst
Email:
Tel:
[email protected]
+86-21-2401-08928
Beijing Gao Hua Securities Company Limited
21
Fortnightly Thoughts
Issue 70
The 3D printing revolution in medical devices
Our European MedTech analyst, Veronika
Dubajova, discusses the 3D printing
revolution in medical devices
Personalized medical devices represent a growing trend in the
healthcare space. While their use was historically restricted to oneoff cases in patients with difficult anatomy, recent advances in
manufacturing technologies such as 3D printing and CAD/CAM
have enabled sizeable parts of the medical device industry to move
towards automated manufacturing of customized devices, often at a
lower cost. Personalised medical devices are largely superior to
standard-sized ones: since they are specifically tailored to the
patient's anatomy, they fit better (there’s no such thing as a normalsized ear canal) and therefore improve the outcome for the patient.
In some cases, the use of personalised devices or instrumentation
can even drive down the cost of the procedure, as is the case for
personalised instrumentation in orthopaedics.
Importantly, recent technology advances suggest that over time 3D
printing could be used to not only manufacture one-off tailored
medical devices, but also to lower manufacturing costs for standard
implants, and in the medium term, to print human tissues, and
potentially human organs, opening up significant possibilities for
drug development, testing, and, in the long term, organ
transplantation. Here, we explore the current use of 3D printing in
medical device manufacturing, and the disruptive potential this
technology has in the medium and long term in our view.
Increasing productivity: Using 3D printing to make
personalised hearing aids
The hearing aid industry was an early adopter of 3D printing, with
most of the industry now using it to manufacture patient-specific inthe-ear hearing aids; we estimate that over 80% of in-the-ear
hearing aids are 3D-printed today, from 20% seven years ago. The
move towards 3D printing has many advantages: it has driven
higher productivity for hearing aid manufacturers (custom in-the-ear
hearing aids were previously made by hand, using injection
moulding techniques), and has significantly improved the fit of the
hearing aid for the patient, resulting in a higher comfort level. In
recent years, 3D printing has also allowed hearing aid makers to
move to more sophisticated materials, which are thinner but harder,
driving further miniaturisation and creating hearing aids that sit so
deep in the ear canal, they are almost invisible.
Automating a once-manual process: Using CAD/CAM for
dental restorations
CAD/CAM (computer-aided design and manufacturing) has been
used for manufacturing dental restorations for over 20 years, but
has only gained popularity in the past 5-10 years, as the technology
became more affordable, the software easier to navigate, and its
use expanded from dental laboratories to dentist’s offices. The
principle of CAD/CAM is akin to 3D printing – the dentist takes a
physical or digital impression of the patient’s teeth, which is
manipulated to create a digital version of a dental restoration (such
as an onlay or crown), and milled either locally or centrally in a
large milling facility, depending on complexity. The key advantage
of a CAD/CAM-made restoration is speed; a CAM machine can mill
an onlay in 2-5 minutes, versus the lab’s approximately two hours
to complete the same process by hand, though, at least today,
CAD/CAM-made restorations are still slightly more expensive than
hand-made ones, given the need for better materials.
Goldman Sachs Global Investment Research
3D printing has driven higher productivity for the hearing aid
manufacturers
Revenue and employee growth, indexed to 2005
220
200
180
160
140
120
100
2005
2006
2007
2008
2009
2010
2011
William Demant - revenues
William Demant - manufacturing salaries
Sonova - revenues
Sonova - manufacturing employees
2012
Note:
Revenue growth includes acquisitions.
Source: Company data.
The growing use of CAD/CAM has had profound effects on the
dental laboratory industry, where the number of dental labs has
declined by 30% over the past five years, as the industry has
consolidated given higher productivity.
Penetration of chari-side milling (CAD/CAM) by territory
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Switzerland
Germany
US
Australia
Rest of Europe
Japan
Source: Goldman Sachs Global Investment Research.
Driving savings: Using personalised instrumentation in total
knee replacements
Patient-matched instrumentation is a relatively new technology in
orthopaedics; it uses either an MRI or CT scan to manufacture a
disposable cutting block which is then used to guide the surgeon
during the procedure. Aside from better patient outcomes,
personalised instrumentation has other significant benefits: it
reduces surgery time, potentially driving higher operating room
throughput, and shortens the duration of hospital stay, lowering
costs per patient. Most importantly, personalised instrumentation
lowers the number of instrumentation trays required during the
surgery, which results in efficiencies for the hospital (such as lower
sterilization costs per procedure) and the device manufacturer
(lower capital investment). We estimate that around a quarter of
knee replacements in the US utilise patient-matched
instrumentation today, up from 0% five years ago, though we
expect this to rise significantly over the coming years.
22
Fortnightly Thoughts
Patient-specific products to lowering manufacturing costs: 3D
printing to manufacture standard implant components
To date, 3D printing has played an important role in manufacturing
one-off, patient-specific devices and implants, enabling a greater
degree of personalisation, and therefore, a better fit for patients in
certain settings. However, over the last 12-18 months, some
medical device manufacturers have begun exploring how 3D
printing could be used day-to-day to manufacture standard implant
components at a lower cost, and potentially with better patient
outcomes. Stryker and Smith & Nephew now both use 3D-printing
to manufacture certain components of knee replacements (tibial
plates), as the technology allows them to produce a rougher
surface that is more suitable to bone in-growth (i.e.
osteoconductive), which in turn increases the implants’ stability.
While the use of 3D printing for manufacturing of standard-sized
implants is still in its infancy – the companies currently use the
technology only for one specific implant component – both Stryker
and Smith & Nephew believe that in certain cases, 3D printing
could not only lead to producing superior products, but also to
lowering manufacturing costs, given less waste (today, most
implants are made using subtractive manufacturing, wherein an
object is carved from a material such as metal, plastic and ceramic,
which leads to wasted material that will not be used for the implant).
While we do not expect 3D printing to become the industry’s
manufacturing technology of choice, we believe that it offers
advantages for certain products, and will therefore be adopted
more widely in the medium term, potentially driving manufacturing
costs lower.
From metal and plastic to living tissues: 3D bioprinting
For years, tissue engineers have tried to produce lab-grown human
tissues robust enough to serve as replacements for damaged
human tissue, with limited success, though 3D printing appears to
be offering a solution. 3D printing excels at creating intricately
detailed 3D structures, typically from inert materials like plastic or
metal. 3D printing’s ability to create intricately detailed structures is
particularly useful for tissues inside the human body, which contain
multiple cell types that are often arranged into a specific pattern or
structure, driven by the functions required of that tissue. For
example, a human blood vessel has three distinct cellular layers; a
thin outer fibrous coating, composed of fibroblast cells and their
extracellular matrix; a media, composed of smooth muscle cells
that can expand and contract in response to physical or chemical
stimuli, and a thin inner layer of endothelial cells that line the lumen
of the vessel and act as a barrier between the blood and underlying
tissue. 3D bioprinting enables this complex construction of tissues
layer by layer, ensuring that each layer contains the relevant cell
types and has dimensions that approximate those of native tissue.
While commercial distribution of 3-D printed organs for
transplantation remains far off, companies and research institutions
are taking steps in that direction with distribution of printed organs
for research use due to begin over the next 1-2 years. In fact,
Organovo – one of the commercial human tissue manufacturing
Goldman Sachs Global Investment Research
Issue 70
companies – expects to start selling liver tissue to drug developers
over the next 1-2 years. There are many advantages to testing
compounds on organs made of human tissue: rodents have slightly
different enzymes, which means that they do not always react the
same way to drugs. For example, if the enzymes in the rodent liver
do not modify the drug, the compound may remain inactive even
though it is efficacious in humans.
What’s going on ‘ear’ then?
Source: Company presentation.
Long term, 3D bioprinting could not only enable us to print human
tissues for testing and potentially human organs for transplantation
(e.g. liver and kidneys), but could also allow us to “construct”
functional organs that merge electronics and human tissues. For
instance, last year, researchers at Princeton University 3D-printed a
“bionic ear”, combining bio-printed organic materials and
electronics. The ear consisted of a coiled antenna inside a cartilage
structure, and while not yet suitable to be used on a patient, it lays
the groundwork for one that could be used to restore human
hearing (the electrical signals produced by the ear would be
connected to a patient's nerve endings, like a cochlear implant).
3D printing offers a range of exciting, and potentially transformative
solutions to multiple problems in the human body. Personalized
devices are a growing trend, and their use will likely increase as 3D
printing becomes more widely adopted. 3D printing should also be
more widely used in the manufacturing of certain standard-sized
implant components, potentially lowering manufacturing costs.
Long term, 3D bioprinting could meaningfully transform drug
development and increase our ability to replace human tissues and
organs, lowering the cost of care for critically ill patients today.
Veronika Dubajova
European MedTech analyst
email:
Tel:
[email protected]
+44-20-7774-1901
Goldman Sachs International
23
Fortnightly Thoughts
Issue 70
Six of the best – our favourite charts
In our six of the best section, we pull together a pot pourri of charts that we hope you will find
interesting. They will be different in each edition but hopefully always of note.
Happier Danes, gloomier Chinese
The ARM army
Deviation of consumer confidence index from long-term average
Percentage of world’s population that…
Avg 2012
Avg 2013
70%
Latest
3
60.0%
60%
59.9%
2
52.6%
50.0%
50%
1
0
40%
35.6%
-1
30%
-2
-3
20%
-4
10%
China
France
US
Japan
Italy
Spain
Netherlands
Australia
Finland
Switz.
Germany
S.Korea
UK
Sweden
Denmark
-5
0%
Uses an "ARM"
based device daily
Is employed (for
age 15+)
Lives in an urban Has an account at a
area
formal institution (for
age 15+)
Source: OECD.
Source: World Bank, Bloomberg Businessweek.
Kicking off
Tweets from the throne
Top 10 kickstarter campaigns by the amount of money raised since
inception
Number of heads of state who tweet globally
Initial goal
140
Total raised
Pebble (customizable E-Paper watch for iPhone and
android)
Has access to
internet
133 (80%)
123 (75%)
120
OUYA (Android based game console)
Veronica mars movie project (Independent film)
100
Torment (game)
Project eternity (game)
80
69 (42%)
Wish I was here (Independent film)
60
Form 1 (High res. 3D printer)
Oculs Rift (Virtual; reality headset for video games)
40
33 (20%)
3Doodler (Pen that can draw in the air)
Emotiv Insight (Wireless headset that monitors and
records brain activity data)
20
-
2,000
4,000
6,000
8,000
10,000
12,000
0
2010
2011
2012
2013
Source: Bloomberg.
Source: DigitalDaya.
Instant feedback
Not as tight as you think
Following M&A announcement, % of companies whose share price
increased and average 1-day price performance of all firms.
Estimated 10-year BBB Industrial spread to Treasury
70%
0.8%
0.7%
60%
0.6%
0.5%
50%
0.4%
40%
0.3%
8
% of acquirers
that saw share
price increase
on day 1
(LHS)
0.2%
30%
0.0%
-0.1%
10%
75th %ile
25th %ile
7
6
5
4
0.1%
20%
Estimated 10-yr BBB Industrials spread
Median
All-time tight
Average 1 day
share price
performance
(RHS)
3
2
1
-0.2%
Source: Bloomberg.
Goldman Sachs Global Investment Research
2012
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
1952
0
1948
2014
1944
2013
1940
2012
1936
2011
1932
2010
1928
2009
1924
2008
1920
-0.3%
0%
Source: Moody’s, S&P, Haver Analytics, Goldman Sachs Global Investment
Research.
24
Fortnightly Thoughts
Issue 70
Disclosure Appendix
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Buy
Hold
Sell
Buy
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Sell
32%
54%
14%
53%
45%
36%
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Goldman Sachs Global Investment Research
25
Fortnightly Thoughts
Issue 70
Price target and rating history chart(s)
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Fortnightly Thoughts
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Fortnightly Thoughts
Issue 70
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Goldman Sachs Global Investment Research
28

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