Biotechnology and Healthcare is one of the largest sectors on the Australian stock market in terms of number of participating companies: according to AusBiotech, the peak biotechnology industry association, the sector has 160 listed companies, with a total market capitalisation of about $150 billion, spread across life sciences, healthcare equipment and supplies, pharmaceuticals, healthcare technology, life science tools and technologies, and healthcare providers and services.
The sector is based on the Australia’s outstanding reputation for biotech research, which has resulted in some major success stories. Prime among these are Gardasil, the vaccine against and the human papillomavirus (HPV) and thus, cervical cancer, which came out of the work of Jian Zhou and Ian Frazer at the University of Queensland, and was commercialised by CSL; influenza treatment, Zanamivir, developed at the CSIRO, in collaboration with the Victorian College of Pharmacy and Monash University; the continuous positive airway pressure (CPAP) machine that solved sleep apnoea, which came out of the University of Sydney Medical School and was developed by ResMed; and the discovery that electrical stimulation could help profoundly deaf people, which was the birth of Cochlear.
From a government-owned vaccine maker, CSL – the former Commonwealth Serum Laboratories – has become a global biotech leader, the world’s largest maker of plasma-based therapies, and a major player in vaccines. Floated on the stock market in June 1994 at the equivalent of 77 cents (after a 2007 share split), CSL is now worth $138, capitalising it at $62.4 billion. Along the way, the original shareholders have received a total of $14.28 per share in dividends – earning just under 200 times their original investment. ResMed has a market capitalisation of $14 billion on the ASX; with Cochlear, $9.7 billion.
These are the success stories – there are also plenty of failures.
It's not always good news
Take the case of Innate Immunotherapeutics Limited, which earlier this year had its lead drug candidate, MIS416, in a Phase 2B (see below) clinical trial aimed at secondary progressive multiple sclerosis (SPMS), for which there are no drugs currently approved for the safe ongoing treatment. Innate had good data on the safety and likely efficacy of MIS416 from prior trials, and was buoyed by the fact that its drug had actually been used for the last seven years in a “compassionate use” program in New Zealand.
Physicians involved in the NZ program had seen significant improvements in motor skills and general wellbeing of patients. But in June, Innate announced that a mid-stage trial of the drug had shown no effect in helping patients. The shares fell 92 per cent on the Australian Securities Exchange in a day, to less than 5 cents, and now trade at 2.9 cents. There is no coming back from that.
Innate had been very upfront with investors, who knew it was banking heavily on its MIS416 drug candidate. As it said, the MIS416 clinical program is its major ‘asset,’ and “outright Phase 2B clinical trial failure would be very hard to survive. But that did not soften the blow: “To say that this result was a shock would be an understatement,” said the Innate annual report for 2017. “We do not understand the obvious disconnect between the reported patient experiences and these unwelcome statistical trial results.”
In drug development, those are the breaks – it is a long process, and bad news at any stage can be as damaging as Innate Immunotherapeutics’ failed trial was.
The pharmaceutical process
A drug developer must conduct extensive pre-clinical laboratory testing before testing a compound in humans can begin. Pre-clinical trials involve thorough testing of the compound in animals (for example, mice) to prove that the compound appears to be safe, and possibly effective in mammals.
Pre-clinical testing usually takes three to four years, and has a success rate of about 1%. If successful, the company gives the relevant information to the US Food & Drug Administration (FDA), requesting approval to begin testing the drug in humans – known as an Investigational New Drug (IND) application.
If the FDA approves the IND (the review takes 30 days), the company is cleared to test the compound in human volunteers, in Phase I clinical trials. These trials aim to determine how the drug acts in the human body, and to investigate any side effects that may occur as dosage levels are increased. Phase I usually lasts from several months to one year.
Once a drug has been shown to be safe in Phase I, Phase II trials aim to evaluate the efficacy – the clinical effect – of the new treatment, in a testing period that may last from several months to two years. Phase II trials determine the dosage and treatment schedules. Phase II is where most experimental drugs fail – only about 30% of drug candidates successfully complete both Phase I and Phase II testing.
The last leg - phase III testing
Phase III trials then look to confirm the clinical benefits of the drug in large numbers of patients; this large-scale testing aims to provide a more thorough understanding of the drug’s effectiveness, benefits and the range and severity of possible adverse side effects. Phase III trials usually take one to four years to complete.
Once Phase III has been successfully completed, the pharmaceutical company submits the results of all the studies to the FDA so as to obtain a New Drug Application (NDA), which means that the drug can be sold to the public.
There is also a fast-track approval process for new drugs that could potentially meet a therapeutic need that is not currently met: for example, NDA approval for the AIDS drug treatment indinavir took just 42 days.
Australian drug developers usually lack the funding to take a discovery from the lab bench all the way to the pharmacy shelves or the doctor’s clinic, and need to bring in partners along the way. A company is likely to need at least $10 million to complete Phases I and II. Most Australian biotechs have the capability, but need a more deep-pocketed partner. Experienced biotech investors understand that the further companies move along the pathway, the probability of success, the valuation and the ability to do a deal with a partner all increase.
Diagnostic tools and medical devices are shorter in timeframe, but the principle is the same.
Watch the money trail
At any time, news flow – good and bad – swirls around the sector. Last week, it was the turn of Medibio Limited, which announced a deal with Japanese pharmaceutical giant Otsuka, which will trial Medibio’s tool for diagnosing mental disorders with its leading drug, Abilify, which is used for bipolar, major depressive disorders and schizophrenia. Medibio shares rose more than 10% on the news.
The rewards available in biotech are huge, as the ageing populations around the world and the increasing spending on health by governments underpin the pharmaceuticals and healthcare markets. According to market research firm Evaluate Pharma, the global pharmaceuticals market will reach US$1.12 trillion in 2022. Deloitte projects total global healthcare spending to reach US$8.7 trillion) by 2020, or 10.5% of gross domestic product (GDP).
Picking the stocks that can benefit from this is high-risk, high-reward, and very investors will have the expertise or the connections to do this consistently well. Investors can look at the companies following the track of CSL, ResMed and Cochlear that make profits and pay dividends; speculators can look for the next big thing.
Dipping your toes in the biotech pool
A lower-risk style of biotech investment is the iShares S&P Global Healthcare ETF (ASX code: IXJ), which taps into the increased spending on healthcare as populations in many countries – developed and developing – age. At present, IXJ’s top 10 holdings are in drug heavyweights Johnson & Johnson, Novartis, Pfizer, Roche, Merck, Amgen AbbVie and Sanofi, as well as medical device company Medtronic and US managed healthcare company UnitedHealth.
Adding this exposure can provide a targeted investment, while also improving a portfolio’s international diversification. IXJ can be used as a defensive exposure to the giants of the global healthcare industry, while also picking up on the upside in the developing world. Another intriguing way that some advisers used IXJ in their clients’ portfolios is as a kind of “personal inflation” hedge: as investors get older and their own health spending increases, it helps to have something in their portfolio offsetting that.
Information current as at 31 October 2017. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. Westpac Financial Services Limited and some of its related entities may have invested in the past, currently or in the future, in some of the companies referred to in this document. The content of this document is in no way a recommendation to invest in, hold or sell interests in the companies referred to.
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