Cancer: The New Cure
Bristol-Myers Squibb, Merck, and Roche Group are making real gains in the promising new field on immuno-oncology.
No one’s more astonished by Carlson’s reprieve than he is: “I said all the goodbyes I had to say, and then at the end of two years…here I am.”
Lasting recoveries from chemo-resistant diseases such as lung cancer and melanoma have raised high hopes for so-called immuno-oncology treatments like the yet-unapproved Roche drug received by Carlson. “This is a man who came in with almost no options,” recalls Yale’s oncology chief Roy Herbst. “Now he brings me his new photographs of birds every time he comes in.”
Successes like Carlson’s occur in one-of-four patients, and Herbst says his goal is to make the treatment work for the other three. Immuno-oncology strategies arise from understanding the defenses used by cancer cells to evade the normal search-and-destroy operations of our immune system. By foiling those tumor defenses, I-O drugs allow the immune machinery to do its job of clearing away cancer cells.
SINCE Bristol-Myers Squibb (ticker: BMY) launched the first I-O drug Yervoy against melanoma in 2011, its shares have doubled, and rivals like Merck (MRK), Roche (ROG.Switzerland), AstraZeneca (AZN), and Pfizer (PFE) are investing heavily in a wide range of treatment combinations for many varieties of cancer. There’s opportunity for all. Dozens of biotech firms, such as Celgene (CELG), Regeneron Pharmaceuticals (REGN), and Incyte (INCY), are also pursuing promising leads. Immuno-oncology products could eventually ring up annual sales worth tens of billions of dollars for pharmaceutical companies that have struggled with patent expirations on previous blockbusters.
Investors have justly awarded Bristol a premium valuation for its I-O leadership with Yervoy and the even more effective drug Opdivo, which the Food and Drug Administration approved against melanoma in December 2014 and lung cancer in March. With studies under way on nearly two dozen tumor types, Bristol could get a third of its sales from I-O drugs by 2020. There’s still I-O upside to its $61 shares, possibly 20% or more.
However, the less-loved stocks of Merck and Roche could be better bets, with gains of more than 20% -- plus yields of 3.2% and 3%, respectively. Merck has been marketing its I-O drug Keytruda against advanced melanoma for a year in the U.S. and just won approval in Europe. The drug should get U.S. approval against lung cancer in October and is in more than 100 clinical trials on over 30 types of tumors.
Former President Jimmy Carter will receive Keytruda for his cancer.
Roche, too, has a vast program to test the drug Bob Carlson gets -- atezolizumab -- including 11 pivotal Phase III trials against lung, bladder, breast, and kidney cancers. The Swiss company is testing six other I-O drugs in the clinic and has a dozen more in the lab.
AstraZeneca and Pfizer lag behind the other three, but are also increasing their commitments to I-O products that could become nice call options on their shares. I-O drugs are a smaller bet for these companies, both of which are in the midst of corporate makeovers. As a result, it’s hard to make an I-O argument for their stocks.
Valuations of the biotechs working in this field already are very generous. Incyte, for instance, trades for 20 times next year’s forecast sales.
While creating a huge market for drug makers, immuno-oncology’s success could also add $30 billion to our nation’s medical bills, and that’s just for treating the 25% of lung and melanoma cancer patients likely to benefit from existing drugs. As new drugs and combination treatments get results for a larger share of patients, these $100,000-a-year drugs may provoke a fiscal reckoning. Still, that’ll be a nice problem to have. Nils Lonberg, a veteran researcher in Bristol-Myers’ I-O labs, believes these anticancer breakthroughs will allow millions more people to maintain healthy, productive lives. “The productivity that will result from successfully treating patients,” he hopes, “will more than pay for the price of these drugs.”
DOCTORS HAVE LONG SUSPECTED that our immune system had a role in controlling cancer. Over a century ago, a New York surgeon named William Coley noticed that tumors shrank in some patients after they’d fought off severe infections. Only in recent decades, however, have researchers had the tools to understand that cancer becomes a disease -- in part -- because of the ways that mutating tumors interact with our immune mechanisms. Cells are always going haywire somewhere inside us. Our body usually does a pretty good job of recognizing malfunctioning cells and killing them off in the same way it does bacteria and viruses.
But when one or more of the mutations in those cells happen to protect them from immune attack, cancer can grow into a problem. Malignant cancers result from a pernicious kind of evolutionary selection, in which the tumor cells with the trickiest mutations are the survivors. “Cancer is a highly evolved disease,” says Dan Chen, the oncologist who heads cancer immunotherapy development at Roche. “That’s why success has been so difficult to come by.”
A few years back, Chen and his Genentech research colleague Ira Mellman sketched an influential portrait of how the immune system responds to cancer, which we adapt in the graphic above. Fragments from cancer cells in a tumor (No. 1 in graphic) get picked up by cells whose job is to provide surveillance (2), which migrate to a lymph node and present telltale pieces of these cancer antigens to white blood cells known as T-lymphocytes. The T-cells activate, proliferate (3) and migrate back through blood vessels (4) to the tumors (5). T-cells recognize the cancer cells (6) with the help of antibody molecules that other components of the immune system mold to fit the cancer antigens. The activated T-cells attack the cancer (7) with cell-busting chemical weapons, creating new antigen fragments, and restarting the cycle.
Each step in the immune process is controlled by sets of counterbalancing signals that can turn up or down the immune cells’ activities. These natural checkpoints serve to focus the attack on hostile targets, while limiting the damage to healthy bystander cells. The immune system even has dedicated cells whose job is to regulate the T-cells’ attack and keep them from destroying the village to save it. Mechanically, the regulatory signals work through receptor molecules on the T-cell surface. Stimulatory receptors are like gas pedals, and inhibitory receptors are like brake pedals, each having a characteristic socket that can only be reached by the right-shaped key -- called that receptor’s ligand.
What’s now called immuno-oncology took off when researchers led by an immunologist named Jim Allison (now at Houston’s MD Anderson Cancer Center) were able to identify one of the immune-suppressive dodges of melanoma, the dreaded skin cancer. With an infusion of specially developed monoclonal antibodies, researchers were able to block off a receptor that normally tamps down the activity of T-cells. By releasing this “brake,” they effectively boosted T-cell activity against the cancer. One of those antibody drugs became Bristol-Myers’ Yervoy, which allows about 20% of treated melanoma patients to survive at least three years. Some have survived more than a decade.
The newer class of I-O drugs, which includes Opdivo and Keytruda, block cancer cells from flipping a powerful off-switch on T-cells, known as the PD-1 receptor. The drugs have proved to be effective across a broader range of cancers than Yervoy, with milder side effects. “In melanoma,” says Merck’s head of clinical development, Roy Baynes, “the PD-1 antibodies are probably the mainstay treatment now.”
The lasting benefit of I-O treatments is a happy contrast to the resistance that tumors tend to develop against chemo and even the modern treatments known as targeted therapies, like Roche’s Avastin or AstraZeneca’s Iressa. When a targeted treatment blocks a function in cancer cells, the cancer adapts with new mutations that overcome the drug. Scientists must then start over and find drugs for new targets.
Immuno-oncology drugs aren’t directed at a preselected target in the cancer cell. Instead, I-O drugs free the immune system to adapt its fight to cancer’s shifts. “With immuno-oncology drugs,” says Bristol researcher Lonberg, “we’re setting up a fair fight between the adaptable immune system and the adaptable cancer.”
WONDERFULLY AS THEY MAY WORK, these first I-O drugs only help a subset of patients. So the drug companies are exploring combinations with dozens of other treatments that address one or more stages in the cancer immunity cycle. By pre-treating a tumor with chemo, radiation, or a targeted therapy -- for example -- doctors might shake loose more tumor antigens for T-cells to attack.
Early clinical studies are also looking for synergies in combining the “brake release” action of an Opdivo or Keytruda with the “gas pedal” boost from experimental drugs that address stimulus receptors. AstraZeneca, Pfizer, and Bristol are each testing various combinations of brake-release and gas-pedal treatments.
Immuno-oncology news has flowed fast this year and promises to become a torrent. I-O studies dominated June’s meeting of the American Society of Clinical Oncology. At the World Conference on Lung Cancer in early September, Roche will report on its PD-1 drug atezolizumab, while Bristol will have data on its Yervoy-Opdivo combo. Later in September, at the European Cancer Congress, Roche could present long-term survival data for its drug combined with chemo.
If I-O drugs fulfill their promise of broad and durable effectiveness, their sales could be unprecedented. Bristol’s asking price for Opdivo is about $150,000 a year in the U.S. and $100,000 in Europe. Several million patients worldwide are now being treated each year for metastatic cancer.
In an April 2015 note, Cowen analyst Steve Scala estimated there will be 2.8 million potential patients worldwide for PD-1 drugs by 2020, half of them with lung cancer and a few percent with melanoma. Using very modest assumptions for market penetration -- 12% of potential lung cancer patients in the U.S. and just 3% abroad -- Scala expects 2020 sales above $12 billion. If new combinations of I-O drugs and other treatments expand the fraction of patients that benefit, his sales forecast for these $100,000-plus treatments could have a big upside.
AS THE I-O PIONEER, Bristol has the best shot at grabbing those sales, with impressive survival data for both Yervoy and Opdivo, and a head start at combining drugs to boost response rates. Bristol’s cancer-drug development chief Michael Giordano says the company has committed to spend heavily on clinical trials to maintain its lead. Cancer drugs brought in 22% of the company’s $15.9 billion in sales last year, with another 28% from antivirals against HIV or hepatitis. Patent protection rolls off this year on top-selling psychiatric drug Abilify, then on HIV drugs in 2018. As a result, Bristol has a lot riding on its success in I-O.
So far, so good. Since its U.S. approval in March, Opdivo has quickly garnered the majority of patients for one kind of chemo-resistent lung cancer. The drug’s Phase III trial on a much more prevalent form of lung cancer was concluded early this year because Opdivo patients were doing so much better than those receiving chemo. That prompted an association of leading cancer centers to recommend that doctors use the drug for the more prevalent type of cancer, even though Bristol has not yet gotten FDA approval to promote it for that indication.
JPMorgan analyst Chris Schott points out in a recent note that Bristol shares trade at almost 30 times his estimate for 2016 earnings of $2.25 a share. That’s a 50% premium to other large U.S. drugmakers -- and that group already enjoys a multiple above stocks in the Standard & Poor’s 500 index. Still, the JPMorgan analyst thinks the cancer drugs will help Bristol grow earnings nearly 20% a year through 2020. As investors come around to that view, he believes the stock can rise from last week’s $61.07 to $75.
Merck has an even more aggressive development effort behind its Keytruda treatment, with more than 16,000 patients enrolled in over 100 clinical trials. With $40 billion in annual revenue, the company’s $7 billion research budget is 60% larger than Bristol’s. Merck R&D chief Roger Perlmutter has claimed Merck’s I-O development program is the world’s largest, as it tests over 40 different combination treatments in collaboration with other drug companies. The firm has an October review date scheduled for FDA approval to market Keytruda for the biggest lung-cancer market.
But Merck has been out of favor with investors, who fear its revenues have topped out. The company’s arthritis treatment Remicade is seeing competition in Europe from so-called biosimilars -- the biotech analog to generic drugs. In the next few years, its cardiovascular franchise will suffer as patent protection rolls off its cholesterol drug Zetia.
Bulls like UBS analyst Marc Goodman think Merck can revive its sales growth with new vaccines and promising drug candidates for hepatitis, diabetes, and Alzheimer’s. And he sees Keytruda sales rising from around $650 million this year to at least $4.5 billion in 2020. At $55.77, Merck’s stock goes for less than 15 times the $3.85 in per-share earnings that Goodman forecasts for 2016. After a few more years of no growth with revenue near $40 billion, he bets Merck will bust out to $50 billion in sales by 2020. Goodman believes Merck stock is worth at least 20% more than the recent price.
Roche’s I-O products will get to market later than its rivals’. But it could well leapfrog Bristol and Merck with a treatment that combines chemotherapy and the I-O drug atezolizumab against lung cancer. At the June ASCO meeting, Roche showed startling response rates in excess of 60% for the combination treatment in a small study on patients with metastatic lung cancer.
Intriguingly, Roche also tested its combo as a first-line treatment for lung cancer, instead of first waiting for chemo to fail. First-line treatment is a far larger market than second-line treatment, which begins only after the first line fails. Roche’s use of chemo -- and its market-leading diagnostics to identify suitable patients -- could make its combo a thrifty choice for Europe’s budget-constrained health systems. At next month’s cancer research meetings, doctors will be watching to see if the initial positive responses to Roche’s lung cancer combo have continued.
Meanwhile, Roche is on a fast track to U.S. approval for atezolizumab against bladder cancer -- a disease with few current options and consequently a big market. Kidney cancers have also responded well in clinical trials of the Roche I-O drug in a triple combination with two other products.
With over half of Roche revenue coming from anticancer treatments like Avastin, Herceptin, and Rituxan, the Swiss firm has an oncology franchise that it’s fortifying with I-O candidates in addition to atezolizumab. The I-O category has the biggest sales potential of anything in Roche’s pipeline, according to Société Générale analyst Justin Smith, who initiated coverage of Roche this year with a Buy recommendation. On the Zurich bourse, the stock goes for 260.70 Swiss francs ($274), 16 times Smith’s estimate for 2016 earnings of CHF16.6 a share. He sees it rising by more than 25% to CHF330.
Also racing for the huge market of a first-line lung-cancer treatment is AstraZeneca, with three studies of its PD-1 drug alone, combined with chemo, and with another I-O treatment. More than 8,300 patients are receiving its PD-1 drug, named MED4736, in studies against six different kinds of cancer. AstraZenaca has also partnered with AbbVie (ABBV) to test that company’s powerful drug Imbruvica with its own I-O products.
Not to be left out, Pfizer is running large studies on a PD-1 inhibitor avelumab, which it is developing with Germany’s (MRK.Germany). In early trials, the drug has performed comparably to rivals’. The company has high hopes for combinations of that drug, says Pfizer cancer researcher Chris Boshoff, with two other Pfizer experimental drugs that stimulate immune-system pathways. As the only company with all three of those I-O products in-house, Pfizer will soon start testing the triple therapy in a number of solid tumors.
So the I-O market is starting to look like it could get crowded. But it also looks like we’re finally starting to outsmart cancer, which could make the market huge. Needless to say, both outcomes would be great for patients. “I’ve never seen anything like this,” says Roche researcher Dan Chen. “This is the beginning of a very special time in the history of oncology.”
