Victories And failures Of Roche, Bristol Myers, and Merck And Why It's Worth Investing In Immunotherapy Now

• The discovery of immune checkpoint proteins was a breakthrough in cancer immunotherapy.
• Today, Merck, Roche, and Bristol Myers are leading the immuno-oncology race, with Merck's Keytruda dominating. Bristol Myers's Opdivo is one step behind, while Roche is still looking for its niches after several failures. 
• The immuno-oncology treatments segment will grow at a CAGR of 12% in the nearest years, so it's a good time to invest in it. Balanced and specialized strategies prove to be the most efficient. 

A Groundbreaking Discovery In Cancer Therapy

In 2018, the Nobel Prize in Physiology or Medicine was awarded to two scientists: James P. Allison of the University of California, Berkeley, and Tasuku Honjo of the Kyoto University. Both of them discovered immunotherapy for cancer by unconstraining the immune response. 

Behind this voluminous formulation is a marvelous discovery that can only be compared to In vitro fertilization in its scale and importance to society. It allows to influence not the treatment of particular cancer but the disease's signaling pathways. This means that not just individual drugs can be made, but immunobiological platforms that can be combined with other anti-oncology medicines to treat multiple types of disease.

How does this work? The human immune system is made up of T cells, which can distinguish "native" cells from foreign ones before destroying the latter. T cells have two simple mechanisms, a gas and a brake. Without the brake, the immune system becomes aggressive and attacks its healthy cells, causing autoimmune diseases, from systemic lupus erythematosus to Crohn's disease. 

James P. Ellison studied the T cell protein CTLA-4 in the 1990s and was one of several scientists who realized that CTLA-4 functions as a brake, or an inhibitor. Other research groups have used this mechanism as a target in the treatment of autoimmune diseases. However, Ellison set out to determine whether CTLA-4 blockade could disable the T cell brake and unleash the immune system to attack cancer cells. In 1994, Ellison and his colleagues obtained impressive results in experiments on mice. 

In 1992, Tasuku Honjo discovered PD-1, another protein expressed on the surface of T cells. A series of experiments showed that PD-1, like CTLA-4, functions as an immune inhibitor but acts by a different mechanism. In animal experiments, PD-1 blockade has also been shown to be a promising strategy in the fight against cancer. This paved the way for the use of PD-1 as a target in the patients treatment. PD-1 can be called a checkpoint that the immune system needs to pass through to destroy the identified target, so the therapy was called checkpoint therapy. 

Thus, a method emerged that differed from existing cancer therapies in one way: it did not affect the cancer cells but the patient's immune system. 

Leading Manufacturers Of Inhibitor-Based Drugs

In 2011, the first checkpoint inhibitor-based drug, Yervoy (ipilimumab) by Bristol Myers Squibb BMY, appeared. The drug was a CTLA-4 inhibitor aimed at treating inoperable melanoma. However, it was not widely used since working with the CTLA-4 protein involves more side effects than PD-1. So later, pharma companies began to develop PD-1 inhibitors.

The first drugs hit the market almost simultaneously: Merck's MRK Keytruda, which received FDA approval in September 2014, and Bristol Myers Squibb's Opdivo, approved in December 2014. The use of checkpoint inhibitors began very cautiously: on the start, the indication was that no other possible treatments were available. Although the new method was approved, it was considered insufficiently tested and potentially dangerous. 

Keytruda was initially approved for the treatment of inoperable melanoma. The famous rule of the winner takes it all applies to the drug. It began to be used for the most commercially viable segments in oncology — non-small cell lung cancer (which accounts for 85% of all lung cancers) and breast cancer. In addition, the drug is used to treat about 15 different types of disease. 

Opdivo has also been approved to treat melanoma. Today, it stays one step behind Keytruda and enters the less capacious segments. Nevertheless, the company has been quite successful in positioning its drug: it has already succeeded in getting it approved for more than ten types of cancer. 

Tecentriq by Roche RHHBY ranks third in the market. It has a different mechanism, but also works with PD-1 protein. It was first approved in May 2016 for treating arterial carcinoma and is also used in the therapy of various types of the disease now. 

To date, there are numerous studies of all three drugs in combination with others used to treat various cancers and mutations. More than ten new checkpoint inhibitors are on the way, and seven are now approved in the United States. Moreover, Chinese players are trying to break into the U.S. market with their inhibitors, taking advantage of local companies. For example, Eli Lilly was going to supply a Chinese checkpoint inhibitor and wanted to take a significant market share from Keytruda. Still, the U.S. regulator did not accept the data. It motivated its refusal by the fact that the racial structure of participants in clinical trials did not match the racial structure of U.S. residents. There are many such cases: although America is a country with free competition, regulators try to protect their pharmaceutical industry.

Recent Discoveries And Failures

Today Merck and Bristol Myers are showing promising results in the immunotherapy segment. For example, Merck reported better-than-expected sales and profits in the third quarter, largely due to increased demand for Keytruda. Keytruda sales for the quarter rose 20% to $5.4 billion, which matched analysts' estimates. Since Merck is expected to lose patent protection on Keytruda in 2028, the company may consider subcutaneous or other versions of the drug, which is currently administered as an intravenous infusion.

Bristol Myers' Opdivo revenues increased 7% YoY. Income in the U.S. was $1.2 billion, up from $1.1 billion in the previous year, boosted by increased demand. Plus, this year Bristol Myers received approval for Opdualag, a combination of Opdivo and relatlimab, for treating melanoma in first-line therapy (a treatment option to be considered first for the disease). In it, the company appears to have found a less toxic drug than Yervoy.

That said, both companies periodically conduct failed trials. For example, four years after the $1.85 billion deal with Nektar, Bristol Myers finally abandoned Nektar's bempegaldesleukin after failures in trials of a combination with Opdivo. The drug was being tested in first-line therapy for renal and urothelial cancer. And Keytruda failed several trials, the most important of which was probably in first-line treatment for liver cancer.

Tecentriq has yet to meet investor expectations because of the failure that occurred with this drug in two clinical trials, Skyscraper 1 and 2. They were designed to determine the efficacy and safety of the drug in combination with the TIGIT-inhibitor tiragolumab in treating small-cell and non-small-cell lung cancer. In addition to PD-L1, there are many other proteins on the surface of immune cells whose blockade would help clinicians win the war against cancer. TIGIT is one such protein. 

Unfortunately, the combination proved to be no more effective than today's treatments. These results were a major disappointment for Roche, because the cost of developing tiragolumab in the pre-clinical phase was estimated at $3.5 billion. There were high hopes for anti-TIGIT drugs. The failure of the first one, which the world's leading company developed, calls into question the role of TIGIT in treating various types of cancer and several other projects based on anti-TIGIT drugs, particularly those from Merck, GSK and Gilead. 

Immunotherapy As An Investment Target 

Unsuccessful trials do not change the overall picture: the oncology drugs segment will grow at a compound annual growth rate of about 12%, which is about twice as fast as the global pharmaceutical market. The segment will give the pharmaceutical giants the most significant increase in money terms, and immuno-oncology will play a vital, if not decisive, role. At the same time, there are other promising areas, such as personalized medicine and CAR-T therapy based on chimeric antigens. In chemotherapy, new drugs are also emerging, mostly of biological origin.

1. Keytruda will dominate the immuno-oncology segment. Two years ago, I said that in 2028 this would be the best-selling drug in the world, with peak sales of $30-31 billion. Back then, few analysts gave such forecasts and called the figure $25 billion at most, but now $30 billion is the consensus. CAGR for the drug would be 9.3-9.5% through 2028. 

2. Opdivo will have about the same CAGR: Bristol Myers Squibb has an extensive research program, including in niches where the company can get ahead of its competitors. 

3. Tecentriq can't be completely off the mark, either. Attempts to enter such a capacious segment as lung cancer and take Keytruda's share there have failed. But the company will find new niches, especially since Roche has enormous opportunities to choose from its drugs already on the market or in development. Despite setbacks, including in the Alzheimer's disease, by 2028 Roche could become the world's leading company with the largest sales of $64-65 billion annually. 

Based on this, I can say that Merck will have a solid growth driver over the next 6-7 years. However, Merck stock today, in my opinion, is inside its fair valuation with little upside potential. Over the past year, its value has risen more than 40%. Bristol Myers Squibb has a similar situation. In the case of Roche, the rule of lousy news matters applies. During a period of volatility in the stock market, investors overreacted to recent failures, so Roche remains an undervalued company with a growth potential of around 25%. I think this is a good time to invest in its shares. Roche is a global leader in diagnostics and oncology and a diversified company with an excellent portfolio.

However, the winners today are those investors who have balanced strategies and don't put all their money into one company or index. I recommend investing in the pharmaceutical market through funds, as it's only possible to understand hundreds of studies by being an industry professional. Funds that use financial engineering techniques are especially in demand. For example, our fund invests in structured products that are based on a basket of stocks and include assets of companies that are not expected to fall in value by more than 35% over the next three years. This allows for an average coupon yield of more than 20%.