Bristol-Myers' Revolutionary Cancer Drug Suffers A Big Blow

In this episode ofThe Motley Fool's Industry Focus: Healthcarepodcast, analyst Kristine Harjes and contributor Todd Campbell discuss a key difference in how these two drugs were studied in lung cancer patients. Harjes and Campbell also weigh in on a unique, new"money-back-guarantee" that's beingoffered by GlaxoSmithKline(NYSE: GSK) on adrug used to treat an ultra-rare disease. A full transcript follows the video.

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This podcast was recorded on Aug. 10, 2016.

Kristine Harjes: This episode of Industry Focus is brought to you by Rocket Mortgage byQuicken Loans. Rocket Mortgage brings the mortgage process into the 21st century with a fast, easy, and completely online process. Check out Rocket Mortgage today at quickenloans.com/fool.

Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. We're talking healthcare today, August 9th. My name is Kristine Harjes, and I'm happy to welcome Motley Fool healthcare contributor Todd Campbell to the show viaSkype. What's new, Todd?

Todd Campbell: Hi, Kristine! How are you today?

Harjes: I'm doing great!

Campbell: Are you excited to talk about some of the interesting trial results last week?

Harjes: Yes, absolutely. We have a really cool show coming up. But before we dive into it, I have something also very exciting to announce. That is that the lovely Alison Southwick of The Motley Fool Answers podcast set up a voice mail box, where you, our listeners, can call in and leave us a message. While, of course, we're always looking for feedback on how we can make the show better, I want to use it to offer you guys the chance to be on Industry Focus.

Here's how it'll work: Todd and I are looking to do a show on pet healthcare. This was a suggestion that came through our Motley Fool podcastFacebook page, which you should definitely join if you're not already a part of it. Whatwe need from you is your best tale -- no pun intended -- of thecraziest thing that you've had to take your pet to the vet or hospital for. Tell us, what did Fido eat,or whatever your best story is. Or, alternatively, tell us a tip you have forsaving money on pet care. I know there have got to bea lot of good money-saving tips out there. Shoot for about 60 seconds or less. Hopefully we'll get somegreat messages that we can play on air. The number to call in to is 866-677-3665, which, oddly enough, spells 866-MRS-FOOL. I'm not really sure why. Many thanksin advance. I can't wait to hear what you guys have to say.

Withthat out of the way, Todd, as you alluded to,we have some really interesting stuff to cover today.GlaxoSmithKline has announced a money-backguarantee payment structure for a gene-therapy drug, which isthe first time that we're seeing something like this happen. But first, wewanted to talk about a type of cancer drug called PD- 1,particularly in light of some disappointing recent newsout ofBristol-Myers Squibb.

Campbell: Yeah, Kristine, thissurprised everybody. Bristol-Myersis one of a few different companies that aredeveloping or have developeddrugs that can inhibit PD-1. Basically, what we're talking about here is,anything that we can do to help the immune system better find and destroy cancer is a good thing.

Harjes: Yeah, one of cancer's worst tricks is that it can just hide from the immune system. They have areally elaborate way of doing this. PD-1 isone of the ways that researchers have foundto work around that and expose these cellsin order to have the immune systembe able to attack them.

Campbell: Exactly. If you take drugs like Bristol-Myers' Opdivo, it willbasically stop cancer frombeing able to use that pathway to hide from the immune system. What we've foundso far in trials up to this point is that Opdivo is very successful in helping the body get rid of cancer -- in kidney cancer, in various other cancers. It's even been shown to be helpful in treating recurrent non-small cell lung cancer. That's important because there's a trial that unfortunately just failed that Bristol-Myers was running, and that trial was for first-line use in treatment naive lung cancer patients. Unfortunately, Opdivo did not deliver the goods in this trial.

Harjes: It'simportant to note that this was a trial for front-line treatments, so the very first therapy that you would get. Andone of the reasons that it was so shockingis because a competitor,Merck, which hasa very similar PD-1 drug called Keytruda, met its primary and secondary endpoints in a trial for Keytruda as a monotherapy foradvanced non small-cell lung cancer less than two months ago. With Bristol failing in its own trial, that's the first time these two have generated completely different clinical outcomes in the same indication.

Campbell: Right,and you could see the market reaction to that news -- it was to knock Bristol-Myers down by about 20%, and forinvestors to flock instead to Merck. What's interesting about this is that,since both of them have the same target, PD-1, why is it that Keytruda worked where Opdivo didn't? As investors, we have to remember thatsometimes the devil is in the details. It's important to dig a little bit deeper. When you do that, you start to see why Keytruda won while Opdivo didn't.

Harjes: Andthat had everything to do with trial design.

Campbell: Yeah. Basically, people who are looking at this story now have to understand,when Bristol-Myers set up their trial,they did it to studythe efficacy of this drug inpatients that were expressing greater than 5% PD-1. Keytruda's trial was designed to evaluate patients expressing 50%, not 5%.

Harjes: Yeah. That's a huge difference.

Campbell: Very high-expressing PD-1 patients.

Harjes: Yeah. It almostdoesn't come as much of a shock when you lookat that particular detail.

Campbell: WhatI would be really interested to see, they didn't releasethe full data setfrom the Bristol-Myers trial yet. That'sgoing to come out later on this year. ButI'll be very interested to see if they break out the response rates and the efficacy by PD-1 expression.

Harjes: They would have to, I would think.

Campbell: Yeah. It would not shock me at all if they showed similar response rates to Keytruda in the high-expressing patients. That being said, the trial wasn't powered,it wasn't designed to look at these high-expressing patients. So, it's kind ofirrelevant. I don't think they would be able to file for a label expansion in the high-expressing patients based on this trial. I guess we'll have to see how that all fleshes out.

Harjes: Youalways want to be wary of post-hoc analysis. Really, what you're seeing here is just a case of Bristol being alittle bit too ambitious. It wasprobably an easier target to hit just those with greater than 50% expression, but they wanted to go for a broader indication, and they missed the mark.

Campbell: Absolutely. That,of course, raises the big question, Kristine --what should investors do now? Should theycontinue to walk away from Bristol-Myers? Should they embrace Merck? Where do we go from here?

Harjes: So, Opdivo has, thus far, been the winner between these two drugs. Opdivo brought in about $840 million in salesin the second quarter of 2016. That wasup almost 600% year over year,compared to $314 million for Keytruda. However, Keytruda also did get some really positive press that the drug was able to ridformer President Jimmy Carterof detectable tumors from his melanoma that has spread to his brain. This makes headlines as amiraculous cure, and there was a lot of really positive press for Merck.

Campbell: Yeah, Opdivo has someadvantages as far astesting advantages over Keytruda in some cases. A lot of people think that maybe is whypeople have embraced that drug as opposed to Keytruda. Investors probably should realize that this is going to be a short-term hit to Bristol-Myers' earnings next year. Analysts have already cut $0.20 off their forecasts for next year. They've added $0.08 to Merck'sestimate for next year. Butboth of these companies -- this is not a deal-breaker or deal-maker for either one of these companies. Keytruda isprobably going to be able to benefit from capturing, maybe, $1 billion extra in sales. That's certainly not chump change. But we have to recognize, too, that this was just one trial that's going on in this patient population. There are other trials that are occurring right now thatcould basically make this a non-event a year from now.

Harjes: Right. There are dozens ofclinical trials going on for Opdivo. This was,as you mentioned, just one of them. Something else I'll point out is there are other PD-1s beingdeveloped.AstraZenecahas one. I think the broaderquestion that is raised here has to do with class-wideperceptions of a therapy. This is the PD-1 class. I thinkit's pretty easy to think, a little bit misguidedly, thatany drug in this class is going to have the same type of clinical resultsand the same type of real life efficacy. That might not exactly be true. This isimportant to remember because this is not the only drug class that has multiple drugs. You also have your PCSK9 inhibitors, SGLT2 inhibitors. We've talked about a lot of different targets that fall under this class category. Andpeople often assume that the effects that one shows are class-wide. They're not always. It'sa good reminder for investors looking at the healthcare space, to takethe drugs individually and actually lookat the different results that they post.

Campbell: Right. And toconsider the trial design. You're right,two months ago, Keytruda'spositive result in their trial,a lot of people probably didn't dig in to see if there might be differences in the Opdivo's trial with design. Yes,investors shouldn't just assume that because there's one drug that works that has the same target, that another one will as well.

Harjes: Right. We arehalfway through our show, and that meansit's time to turn our attention tothe other topic du jour, which is gene therapy,specifically a GlaxoSmithKline gene therapythat promises your money back if it doesn't work.

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Let'sturn our attention back to gene therapy now. Todd,what do we need to know?

Campbell: This is just a really interesting story,especially given how much everybodyhas talked about cancer drug pricing over the course of the last couple years. I thinkit's probably not brand-new news to our listeners thatmost cancer drugs that are getting approved today are hitting the market with six-figure price tags. When we talk about that, we have to also then talk about the expensive drugs that are being developed for other diseases as well, including rare diseases. What I found really fascinating about this story is thatGlaxoSmithKline just won approval for a drug called Strimvelis over in Europe. It'sgoing to be sold in Italy. As part of thenegotiation with Italyto provide this drug to patients, theyagreed that if the drug doesn't work, they'll refund the cost. That is pretty interesting,especially when we start thinking abouthow that could be used in other disease classes or indications like cancer.

Harjes: Absolutely. Strimvelis is $665,000. That's the list price for one-time treatment. That is over $0.5 million. But, Glaxo says, but, this issomething that you only need to do once. When you look at what it treats,it's a rare disease called ADA-SCID, also known as "The Bubble Boy disease," because theimmune system doesn't properly defend the body against infections, so patients are essentially forced to live in a sterile environment, hence the Bubble Boy name. Glaxo tested this in 18 children, and they found that with 15 of them, a single therapy of Strimvelis wasenough to cure them. But then, you have the three children that it didn't work for.

Campbell: Right. And what Italy said is, "Listen, this is avery expensive drug,and it's not going to work every time. If you want us to pay $665,000 for this treatment, you have to be willing to give the money back if it doesn't work in those three patients." I think they're estimating that one out of every six patients that's treated will end up getting a refund. That's pretty fascinating. Butthe other thing that jumps out to me, Kristine, from the story, is, wow, it was really only tested in 18 children? And that just shows you how rare this disease is. I think theyestimate that there's only about a dozen people in Europe -- all throughout Europe -- that are born with this condition every year.

Harjes:Andif you run the numbers using that, if you have 12 children a year that are born with this disease in the EU, treating all of them would result in about $8 million of revenue. Then, if you refund one in six, which is based on your three out of 18 that didn't have a result, that's only $6.65 million in revenue, whichis just not going to move the needle for Glaxo. Really,when I look at this story,I think it's painting Glaxo in a pretty positive light that they are researching a disease that's reallynot going to make them much money, and they're saying that they're so confident in it that they're going to give the money back if their therapy doesn't work.

Campbell: It's a fascinating step in what could be a very new model that gets rolled out globally forpaying for drugs -- especially as these drugs get more and more expensive. Italy has been a pioneer in these types of arrangements. This isthe first arrangement they've made. They've actually been working on pay-for-performance deals since 2007. They did a bunch of these deals with cancer drug makers back in 2010. Not exactly the same thing, not full100% refunds, but getting back price discountsfor when the drugs don't work as well as maybe "advertised."

What I think this does say about Glaxo, and maybethe broader research into the use of gene replacement or gene-type therapies, is that companies are willing to investigate novel payment structures or reimbursement structures if it means being able to get a larger price for their product down the road. Glaxo is probably thinking the long game here. They're working on some cancer drug therapies with a small company namedAdaptimmune. These are early-stage trials for gene-based TCR therapies, total receptor therapies, that, who knows. Maybe those would come out targeting small patient populations and have similar pricing arrangements in the future, as well. It's a very interesting story. We're going to have to keep an eye on it. It could make a big shift in how this industry operates.

Harjes: I think this is Glaxosimply getting their hands a little bit dirtyin this new pricing model,and also in gene therapy, which should bepoised to become a lot more broadly used than justthis one drug in Italy. There's drugscoming soon for hemophilia, brain diseases, eye diseases. Definitely something to watchgoing forward.

That's going to do it for your Healthcare edition of Industry Focus. I'm reallylooking forward to hearing all of your pet health voice mails.As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.