2 Sets of Disasters Biotech Will Pay For in 2019

This has been another thrilling year for the biopharmaceutical industry. Amazing clinical-trial results, landmark drug approvals, and big acquisition announcements helped the Nasdaq Biotechnology index rise 14% from the beginning of 2018 through the end of September.

Since then, though, the same basket of biotech stocks has fallen 16%, and investors are justifiably concerned about the year ahead. Here's how a couple of industry trends that started in 2018 will probably play out in the year ahead.

Commercial flop fallout

In the last half of 2017, the Food and Drug Administration (FDA) approved three new therapies that accomplish tasks physicians wouldn't have dreamed possible several years earlier. EvaluatePharma's a relatively conservative independent source of industry analysis that publishes an annual look forward, and all three of these treatments missed expectations that they announced in late 2017 by a mile.

Luxturna is a one-time injection that prevents patients with a certain genetic mutation from losing their eyesight. It also costs $425,000 per eyeball, and insurers haven't been as enthusiastic about reimbursement as analysts had hoped.

Luxturna also is Spark's first drug, and independent launches tend to flop more often than those backed by industry giants. That's why all eyes will be on Zolgensma, a one-time gene therapy for spinal muscular atrophy (SMA) that Novartis is widely expected to launch in early 2019.

The treatment formerly known as AVXS-101 will go toe-to-toe with Spinraza, which requires lifelong injections and has already become a blockbuster. Since we already know the SMA indication can generate big numbers, enthusiasm for the entire gene-therapy space will dwindle if Novartis can't make Zolgensma work for its bottom line.

Yescarta and Kymriah are both chimeric antigen receptor T-cell (CAR-T) therapies, which means they're essentially bags of a patient's own immune cells that have been trained to spot a target often found on cancer cells. These CAR-T therapies have given patients previously considered untreatable a surprising new chance at long-term survival, but sales have been disappointing.

The fallout from these commercial flops will have a huge effect on biotech dealmaking in 2019. Gilead shelled out $12 billion for Kite Pharma in 2017 to get its hands on Yescarta, and the odds of Gilead realizing a return on that investment are getting slimmer. Yescarta and Kymriah both aim for the same target, CD19, and Nature Reviews Drug Discovery counted 75 potential new CD19-directed treatments in clinical trials in October.

The pace of competition also appears to be quickening. In early 2017, bluebird bio (NASDAQ: BLUE) reported stunning data for a candidate directed against BCMA, a multiple myeloma target that hadn't received a great deal of attention yet. In October 2018, researchers found 20 candidates in clinical trials directed against BCMA, which was twice as many as they found a year earlier.

Dismal commercial performances combined with incoming competition means you probably shouldn't expect many start-ups based on CAR-T and related technologies to sign lucrative partnership deals in 2019 and, perhaps, beyond.

Proof-of-concept flop fallout

Keytruda and Opdivo are PD-1 checkpoint inhibitors that make it hard for tumors to hide from the immune system. These drugs are highly effective for a limited cross section of patients, and in 2018, huge sums were lost chasing efficacy-boosting combinations that looked great in single-arm early-stage clinical trials.

Earlier this year, epacadostat became the first big domino to fall once it was compared to standard care in a controlled trial, and it was followed by additional disappointment. In a nutshell, we learned the hard way that successful results for small, single-arm studies can be deceiving.

The U.S. clinical-trial database lists nearly 900 clinical trials for Keytruda alone, and in hindsight, we probably should have expected some false positives. In the year ahead, companies that have vaulted to nosebleed valuations without any human proof-of-concept data probably won't find collaboration partners or a market that's easily impressed.

A higher bar for proof-of-concept data means high-flying start-ups such as CRISPR Therapeutics AG (NASDAQ: CRSP) will probably have more to lose than gain in 2019. Crispr Therapeutics already boasts a $1.7 billion market cap despite no evidence its treatments are safe or effective for humans yet. In the year ahead, it's probably best to watch Crispr and every other high-value biotech that are developing complex and unproven new treatments from a safe distance.

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Cory Renauer owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Bluebird Bio and Gilead Sciences. The Motley Fool owns shares of CRISPR Therapeutics. The Motley Fool has a disclosure policy.