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Valuation

Is it time to go orphan?

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Over the years, numerous of investigations and articles have analyzed the likelihood of a drug’s approval per each phase of the clinical development. Latest in line is the Endpoints’ piece PhI may still be a killing field of failure but PhIII success rates have surged, signaling tectonic shifts in biopharma R&D. Endpoints conclude that the statistics haven’t changed much over the years – with one exception: the likelihood of success for Phase 3 trials has increased. But why is that and what difference does it make to an investor?

Endpoints news base their article on an analysis from The Centre for Medicines Research (CMR) international that was published in the top tier journal Nature reviews earlier this month. According to Endpoints, the data show that the success rate of all drugs making it from Phase 1 to market is 6-7%. This has more or less been constant over the past decade. For all drugs entering a Phase 2 trial, only 15% make it to the market. This number increases to the modest 62% when looking at how many Phase 3 drugs reaching the market. A decade ago, however, the success rate was only at 49%.

The CMR analyst found two key trends behind the increase in the Phase 3 success rate:

1. Big Pharma has become better at concentrating their last-stage resources

CMR argues that a dip in the number of drugs entering Phase 3 suggests that the big players have become better at concentrating their last-stage resources on therapies with high chance of success, i.e. Big Pharma has become better at selecting successful molecules. Based on our experience, however, we find this unlikely. Although, there might be some truth in that increased competition and stronger shareholder demands have limited Big Pharma’s freedom when it comes to what they can invest in.

2. Increased focus on rare disease drugs

The second trend identified by CMR is an increased focus on rare disease drugs. To us, this sounds like a more likely explanation as most industry experts believe that orphan drugs are more likely to succeed. We see several explanations behind this, such as higher success rate, where a few is the simpler underlying statistics, more help from authorities, major clinical needs and few existing treatments available. Both Hay et al. (2014) and a report on Clinical Development Success Rates 2006-2015 also conclude that orphan drugs have a higher success rate across all three stages of pharmaceutical development. According to Hay et al., orphan phase 3 success rate in 2014 was 66.9% compared to 60.1% across all indications. In other words, this increased focus on orphan drugs is supported by our own experience, as well as previous literature.

If you are choosing between investing in the execution of a Phase 3 study targeting a common disease or a rare disease, the latter should in the long run provide a better return on investment.

Conclusions: Should you go orphan?

Statistics on large groups are always difficult to apply on the individual case. Based on CMR:s statistics, previous literature and our own experience, our conclusion is that this evidence base indirectly imply that if you are choosing between executing a Phase 3 trial targeting a common disease or a Phase 3 trial in a rare disease, the latter should in the long run provide a better return on investment. This applies just as much to managers prioritizing between existing products in their portfolios as to retail investors choosing in which company to invest. For drug developers, this means that rather than going for one of the world’s most common diseases, it could be strategically-wise to focus the effort on a small niche indication.

One example of a company that choose the orphan way is Oncopeptides. In 2015, Oncopeptides announced that both FDA and EMA had granted Orphan Drug Designations for the company’s lead candidate melflufen, in the treatment of multiple myeloma. In addition, the company recently announced an intent to apply for accelerated approval in the U.S. and are currently conducting four parallel clinical studies.

Why biotech companies are eyeing China

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During the past few years, the rising economic power of China has become more and more notable. As of today, China has the world’s largest population with approximately 1.42 billion people and the second largest economy with a gross domestic product (GDP) of $9 trillion. The pharmaceutical industry is not an exception to this economic trend. Just by looking at the numbers, the pharmaceutical market size from 2015 equaled to $181 billion, with generics making up only 7% of the whole market ($12.6 billion). It is, however, far from pure numbers that are driving biotech companies’ interest to enter the Chinese market. As you’ll see in this blogpost, the constantly growing market, favorable approval processes, investments and China’s current ten-year plan are all important factors that are feeding the interest of international biotech companies to explore new territories.

Traditionally, Chinese companies across all industries have mainly been dedicated to the manufacturing and imitation of new technologies. This was also true for the biopharma industry where generics and manufacturing of existing drugs long ruled over the development of new innovative drugs and where, by the end of 2017, more than 90% of the companies developing active pharmaceutical ingredients (API) in China were generics. However, this industry is expected to take a sharp turn as the revised IPO regulations in Hong Kong, increasing private and public investment in the sector, governmental initiatives and changing regulations are expected to foster innovation and boost the development of novel therapies in the country.

According to EY analysts, the Chinese pharma market had an annual growth of 8% between 2014 to 2017. However, this number is projected to increase to about 14% between 2018 and 2020 and it will be primarily driven by the increasing population and the change in lifestyle that has led to an increasing prevalence of diseases such as cancer, diabetes and high blood pressure. Adding interest to the non-domestic biotech companies is that Chinese people are becoming both more open to try Western medicine and are becoming richer, meaning that more people can afford more expensive and branded medicines.

Increasing government supported investments and acquisitions

In 2015, the Chinese government launched a ten-year plan, called “Made in China 2025”, aimed at positioning the country as a dominant leader in high tech and advanced industries such as biomedicine. Through a number of favorable policies, this plan has already had a substantial impact on the domestic bio-medicine industry and continues to encourage its development with investments to foster innovation in the sector stretching as far as $100 billion. Examples of favorable policies include the support for the development of new and existing bio-medicine life-science parks and subsidies (state funding, low interest loans, tax breaks, etc.) for the acquisition of overseas intellectual property (IP) or advanced technologies. However, biotech companies seeking their next investment from a Chinese partner should be aware of any “forced transfer agreements” that might come along with the offer. These agreements mean that foreign biotech companies who would like to do business in China sometimes are required to have a joint venture with a Chinese firm. Through these agreements, Chinese firms can inherently gain access to IP and know-how of advanced foreign technologies and leverage this for their own acceleration.

Some of the technologies that China aims to advance through the “Made in China 2025” policy are the following:

  • Development of new products for chemical drugs
  • Traditional Chinese medicines and biotechnology drugs for major diseases, including new mechanism and new target chemical drugs
  • Antibody drugs, antibody-conjugated drugs
  • New structural proteins and peptide drugs
  • New vaccines
  • Personalized treatment drugs
  • Medical devices
  • High-performance medical equipment such as imaging equipment and medical robots
  • High-value medical consumables such as fully degradable vascular stents
  • Mobile medical products such as wearable and remote medical treatment
  • Breakthrough and application of new technologies such as 3D bio-printing and induced pluripotent stem cells

Thanks to the new regulations and governmental plans that China has created in order to become a frontier in bio-medicine innovations, we are starting to see a burst of Chinese biotech and pharma companies.

Changing rules in the Hong Kong Stock Exchange

An interesting factor that makes China an attractive case for many biotech companies are the newly established rules in the Hong Kong Stock Exchange that allows public stock investment in pre-revenue or development stage biotech companies in China and internationally. While Hong Kong is an autonomous territory or a so called Special Administrative Region of the People’s Republic of China, there is huge amount of money that will be poured in IPO offerings for Chinese drug development companies. Since 2018, the IPO of  Ascletis Pharma ($400 million), BeiGene ($903 million), Innovent Biologics ($422 million), Hua Medicine ($110 million) and Shanghai Junshi Bioscience ($394 million) brought up a total of $2.2 billion.

An attractive approval process and reinforced quality

Since 2015, China’s drug regulatory authorities have taken several steps, known as the examination and approval reform, to speed up the approval of new and/or innovative drugs. This reform has allowed the acceleration of drug development and the creation of better environment for Chinese life science companies through the revision of the approval process by the Chinese authorities (pharmaceutical market) that now recognizes foreign clinical trial data or World Health Organization’s pre-certificate results and the reduction of administrative approvals costs. Also the Centre of Drug Evaluation (CDE) in China is making an effort to reduce the backlog of drug review, meaning the CDE is decreasing the amount of applications waiting to be revised. 

Also, the requirements to register a new drug in China is nothing out of the ordinary. A quick examination of the clinical trial requirements to register a new chemical drug through the Chinese Food and Drug Administration indicates that new innovative drugs and improved new drugs that have been marketed outside China only require pharmacokinetics and a phase 3 clinical study. The application process for these types of drugs can be performed through the “Imported innovative drug process”. New drugs that have never been marketed in or outside China, however, require the regular phase 1, 2 and 3 clinical studies and a “New drug application process”. It is also worth mentioning that the regulations around generic drugs are improving in China as the regulations are being reinforced to promote better quality of generic drugs.

Trends among life science companies

Thanks to the new regulations and governmental plans that China has created in order to become a frontier in bio-medicine innovations, we are starting to see a burst of Chinese biotech and pharma companies. Additionally, possibly thanks to governmental incentives and subsidies to do so, we are starting to see a trend towards Chinese companies and investment firms scouting for assets or new therapeutic solutions to acquire and catch up with the lagging innovation that lingers from the previous focus on the manufacturing of generic and existing drugs. Therefore, many small biotech companies around the world are starting to strategically consider entering the Chinese market and/or approach Chinese VCs or companies backloaded with cash. Indeed, with the changing regulations, the Made in China 2025 investments and the changing rules of the stock market, China is an interesting case for any biotech company looking to accelerate. Just be aware of any “forced transfer agreements” which may result in you paying for your success in China with all of your IP and know-how.