By Wayne Koberstein, executive editor
My first tweet at this year’s JP Morgan Healthcare Conference was, “Interesting Celgene bases forecasts on ‘operational momentum’ not pending clinical trial results.”
It was far from the only place the word momentum appeared at the conference; for the key question on everyone’s mind was how much the stunning surge in IPOs and other funding for small life sciences companies in 2013 would carry over into the new year. If I had to hazard a description of the consensus answer, it would be, “No more boom, but no bust either.”
It hardly made for a comfortable feeling. The companies that attracted big dollars last year were overeager to justify the trust put in them. Other small companies occupied another notch up on the anxiety scale, lest they miss out on the high funding tide — one still rising, but whose ultimate crest remains unknown. The large companies, for their part, ranged from defensive but determined, to selfcongratulatory. On balance, however, general optimism overcame uncertainty and generated great energy at the event, buoying up the mood of the crowd to match the sunny vista of Union Square outside the St. Francis.
Energy is good. Energy plus data is better. Although I agree companies should not project value or growth on what might happen in clinical trials, the acid test for any company pitching its concept is solid, preferably human, data. That axiom applies especially to the current race for accelerated review at the FDA. Another principle that boiled up again and again at the event: Business models matter. There is no stage too early to define one. When a company creates a new platform or product, it should ask itself, “How will this work in the patient/practice setting? Who will be willing to pay for it, and how much? How will we make the product, distribute it, and ensure its safe supply?”
Thus, when Novartis said it was feeling good about the potential breakthrough drugs in its pipeline, giving honorable mention to its CART (chimeric antigen receptor therapy) project with the University of Pennsylvania, my tweeted comment was, “I still have doubts on CART biz model — cell manipulation unwieldy.” My doubts do not concern CART’s basic viability but the issue of practical limitation — how widely can such a complicated procedure be applied? For example, even after decades of use and improvement, blood stem-cell transplants have never become commonplace.
Any successful immunotherapy helps prove we can employ the immune system to fight cancer and perhaps other diseases, but the challenge is to do it with the most practical, cost-effective treatment forms and delivery means possible. If not oral drugs, then injectables or even IV formulations would seem, at least at this point, superior to cell transfer.
But who am I to argue with Novartis? The company reached the traditional Big Pharma double-digit growth levels in 2013, reporting a third-quarter rate of 17 percent. Nevertheless, Novartis also declared a new level of introspection: Get ready for some business-unit divestitures, central-procurement and manufacturing- quality initiatives, and increasing emphasis on productivity in 2014 to overtake patent and revenue losses.
BIG PHARMA EDGES BACK IN
During the conference, Chief Editor Rob Wright and I met with, or simply met, a number of small companies and even held a private roundtable of small-cap CEOs and investment experts off-site. Much editorial will flow from those encounters over the months ahead, but here I will focus a bit more on the large pharmaceutical companies that are trying to retain, or restart, their own momentum this year.
Roche, like its neighbor on the Rhine, had good news to declare. It touted its sales growth and pipeline rebound in the past few years and said it flirted with double-digit growth and margins in 2013. Roche has certainly pumped up its oncology pipeline with a number of candidates for single or combination immunotherapy.
On the other end of the teeter-totter from Novartis and Roche was Lilly, whose CEO John Lechleiter displayed extraordinary patience in the breakout as he and his team tackled sometimes picayune queries about the company’s pipeline. Setbacks in clinical trials, of which Lilly seems to have had more than its share, put the company in the sights of more than one questioner eager to score sardonic points.
Why do disappointing trials still surprise us? Doubtless, Lilly needs some successes, but I can see no reason to believe at this point that its remarkable but largely unremarked crop of candidates will yield worse results than other companies’ pipelines, in the long run. If Lilly has problems in R&D, they are likely similar to what you would find on close inspection among its peers. Some Big Pharmas obviously have a higher rate of success in picking winners from the well of life sciences discovery. But if companies are now competing as well on clinical trial design and execution or operational excellence in general, none has made an obvious leap ahead of the pack.
Lilly is pinning more immediate hopes on its Novel Basal Insulin Analog product, which would be consistent with its history of leadership in diabetes. If the product launches as hoped in 2016, it will employ much of the company’s underused manufacturing capacity. Productivity improvements have lowered Lilly’s R&D costs, despite creating the biggest pipeline in its history, the company reported. Successful launches of its oral diabetes 2 drugs will give the company a good shot at expansion in the primary-care market, it said.
At this year’s JP Morgan Healthcare Conference, Life Science Leader hosted an off-site, private roundtable of smallcap CEOs and investment experts.
As Lilly was open, AstraZeneca was particularly opaque, even in the breakout, and no amount of quibbling queries could roll back the company’s official cover. “Why ask such detailed questions about AZ’s pipeline when they won’t share anything not already disclosed?” I tweeted. “The only novel information companies and their chief executives disclose are insights into their strategic thinking in answer to insightful questions.” It was difficult, however, to see anything beyond AZ’s single, monolithic strategy these days, which I described as, “Be into everything, overwhelmingly, and you’re bound to win more than lose.”
Merck (MSD), on the other hand, was trying its best to be transparent. CEO Ken Frazier stressed “accelerated strategic actions for growth,” but unfortunately he was playing against the backdrop of clinical setbacks and patent losses, accenting how good times for the company now appear to lie only in the past or in hopes for the future. It seems Merck still struggles with the integration of Schering-Plough, which forced the company to make hard decisions about products and therapeutic areas that would remain in the combined pipelines. Whether Merck made the right choices will only become obvious over time. The more failures it has coming out of the clinic, the greater the pressure on management to reconfigure the pipeline yet again, at least by acquiring some relatively low-risk products.
Meanwhile the other Merck, aka Merck KGaA or Merck Serono, is looking and sounding more and more at home in the larger world. When I first visited the company in Darmstadt in the early 1990s, it could at best aspire to regional expansion beyond Germany and the EU. Now, thanks to Serono’s previous foothold in the United States and market growth since the merger, the company has successfully reoccupied territory it lost to reparations after World War I. It was modest in its disclosures at the conference, however, citing sales growth and gross margin “in line” with its peers while also noting below-benchmark spending in R&D and SG&A (selling, general, and administrative).
Look for more biosimilars and fewer specialty drugs in this Merck’s future, as it tries to squeeze still more productivity out of R&D. But the company will also continue to innovate in its strong areas, such as endocrinology, and in new ones, such as combination cancer immunotherapy.
Takeda is another company leaving regionalism behind, and over time, it is becoming more global than Japanese in management, strategy, and culture. The company plans to promote its new COO, ex-GSK exec Christophe Weber, to the CEO position after current President and CEO Yasuchika Hasegawa becomes chairman in June. Both men participated in the company’s breakout session, and they left the strong impression the transition would happen soon.
Hasegawa told me the company has become steadily more diverse through the years and will become more so as new leaders emerge from its international operations and acquisitions such as Millennium (though Weber “parachuted in” from GSK last November). Takeda’s top financial and strategic goals for 2014 come right out of the Western playbook: efficiency, productivity, globalization of operations, procurement, integration of R&D, and intellectual property protection. In the GI therapeutic area, as others’ patents expire, the company aims to claim the territory as global number one.
GlaxoSmithKline’s CFO, Simon Dingemans, may have coined a new industry euphemism in saying the company had encountered “unexpected headwinds” in 2013. Beyond its bribery scandal in China, however, the company news was mostly good: “We put growth back in the system,” said Dingemans, as shown by a modest but positive rise in sales of 2 percent. Still, GSK has also trimmed down — simplifying its business portfolio to just pharmaceuticals, vaccines, and OTC medicines. The restructuring delivered billions of dollars in savings, but the company is now looking at cost-of-goods and the supply chain for more weight reduction even as it bulks up its sales volume and lifts new revenues. In fact, Dingemans said the company wants its EPS to grow faster than sales.
GSK’s R&D delivered five new products in 2013, but the products are “still in their early days.” Likewise, the company expects an “interesting wave” of Phase 3 data in 2014, but Dingemans downplayed any excitement about the late-stage pipeline. Following a noticeable trend among the big companies, GSK ended the year with a large share buy-back, explaining it wants to “keep the balance sheet tight” but with plenty of room for investment opportunities.
CARPE DIEM FOR THE SMALL-CAPS
Those investment opportunities for GSK and its industry peers lie mainly in the small-cap life sciences sector, of course, which is increasingly active in the smallmolecule side as well as biotech. But there was a palatable change in the air this year. Even though the past year’s IPO boom may be behind us, the momentum it has created now sustains a new level of confidence among the smaller players. Undaunted by the continued coolness among VCs, the small-caps now have somewhere else to turn besides Big Pharma to fund drug development, as well as the potential for regulatory relief from the costs of late-stage trials.
The IPO attrition in the new year has been visible, at times dramatic, but somehow optimism has persisted. Though my imagination may be fooling me, I sensed greater pride and confidence among the small-company execs encountered at the conference — as well as a more solicitous attitude toward them by the big companies.
If any company could be expected to douse cold water on its sector, it would be one like Ariad. Only a few months before the end of 2013, Ariad was a darling of Wall Street. With its leukemia drug Iclusig (ponatinib) on the market thanks to an accelerated review by the FDA and Phase 3 trials under way that would have greatly expanded Iclusig’s market, the company sported an extraordinary market cap of about $4 billion.
Then last fall, serious safety problems suspended the product’s sales and the clinical trials. Although Iclusig has returned to the market for a narrowly targeted patient group in CML (chronic myeloid leukemia), its future is, to understate the matter, highly uncertain. At the conference, the most the company could say about the product was that it appears to stabilize patients in its current use. Interestingly, though, Ariad has generally traded up since its big fall in October, and it has not dragged the sector down as some predicted.
I am going to hazard a highly speculative theory to explain the case: However much investors may reward or punish a single company, they appear ready to learn from the experience rather than run from it. What we may be witnessing is a race among companies to set the gold standards for clinical data at both the investment and regulatory levels. Even though Wall Street and the FDA have opened new routes for Phase 2-based entries, they will base their criteria on a comparison of different companies’ data, creating a natural selection mechanism and inevitably raising the general standard for IPOs and for accelerated reviews.
Now, if only the life science investors of 2013 could also acquire a more longterm perspective, their optimism would not wane, however, their realism could sustain them. Rougher, discouraging times will come again, and the historical volatility of the stock market in the sector may stimulate but can never maintain the momentum of small-cap innovation. For the needed change to happen, naïve investors must grow up to become wise investors. By next year’s JPMHCC, we shall no doubt see which way the wave breaks: Will small-caps be forced to turn once more to Big Pharma with hat in hand, or will the latest crop of life science investors develop some staying power?