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Is Merck Leading the Way for Cancer Treatment?

Gino Rossi, Back-up Global Portfolio Manager, Healthcare Analyst

Late last year mainstream media announced a “breakthrough in lung cancer treatment” (read the article here). Pembrolizumab, marketed as Keytruda, is the new drug made by U.S pharmaceutical company Merck. Keytruda has shown impressive results in first line treatment for non-small cell lung cancer. In its recent trial, 45% of patients saw their tumours shrink compared to only 28% for those given chemotherapy.

Keytruda Keynote 024 Trial Results

Source: New England Journal of Medicine

Keytruda is part of a new breed of immuno-oncology cancer drugs which work on the principle that the body’s immune system has the best chance of defeating cancer cells. These drugs target some of the specific ways cancer can avoid detection and attack from the body’s immune system.

Keytruda is destined to improve the lives of many lung cancer patients. However, what the six o’clock news failed to mention, is that Keytruda will only be prescribed as first line therapy for patients where a biopsy of their tumour shows they have high levels a surface protein known as PD-L1. This is the protein to which the drug’s antibodies attach. Unfortunately, only around 20% of patients will fit this criteria. For the other 80% of patients, chemotherapy is still the best option for first line treatment.

The race to develop a drug for these remaining 80% of patients is on, and will heat up in 2017. Globally, lung cancer is the most prevalent cancer in men, and third most prevalent in women. In Australia, thanks to a long campaign of anti-smoking initiatives, lung cancer is the fifth most commonly diagnosed cancer. Morgan Stanley estimates the size of the global immuno-oncology market in non-small cell lung cancer will be $24 billion by 2020, with the bulk of that in first line therapy.

In the box seat to grab the remaining share of the market are Roche, Merck, Astrazeneca and Bristol-Myers Squibb. Bristol-Myers Squibb were seen as the front runners in this indication. However, the company’s drug trial for the treatment Opdivo, did not meet its primary endpoint of ‘superior progression free survival’ (tumours not growing) compared to chemotherapy. Astrazeneca’s Durvalumab has also had a recent setback with its latest trial failing to meet the progression free survival endpoint. The stock was down 15% on the news.

Roche, which we hold in our global SMAs, has the PD-L1 drug Atezolizumab, marketed as Tecentriq. Roche’s trial comparing Tecentriq to chemotherapy in first line therapy is due towards the end of 2017. Encouragingly, in second and third line lung cancer studies, Tecentriq showed strong responses in both patients with high and low levels of the PD-L1 surface protein (relevant for the 80% of patients not suitable for Keytruda). While not approved for first line treatment, Tecentriq is taking market share in second line lung cancer therapy.

Cancer is increasingly being recognised for its heterogeneity. One size does not fit all, and treatment will be increasingly personalised for each individual. The standard of care is likely to increasingly begin with the profiling of a tumour, which will dictate what treatment the patient should receive.

This trend plays into Roche’s strengths. Firstly, as well as being the largest oncology pharmaceutical company in the world, Roche is also the largest diagnostics equipment supplier in the world. Having the diagnostic capabilities and drug development under the same roof is an increasingly important competitive advantage. Secondly, Roche derives around 60% of its US$52 billion annual revenue from oncology, making it the most specialised in this area of all the major pharmaceutical companies. With a personalised approach to oncology, companies can no longer focus on a single drug, and need to be in the position to lay multiple bets. Roche’s breadth and resources (including US$10 billion in annual R&D) gives the ability to do this better than anyone. As testament to this, Roche recently disclosed that it has 10 new immunotherapies in development, like Tecentriq.

We are in the early stages of immuno-oncology drug development and Roche presented its latest one at this year’s American Society of Clinical Oncology conference. Many more will follow. While Keytruda is dominating at present, there is a long way to go in the battle against cancer and we believe Roche is best placed to lead the innovation that cancer patients and their loved ones so desperately need.

This article has been prepared by Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484. It has no regard to the specific investment objectives, financial position or particular needs of any specific recipient. You should seek your own professional advice in relation to any financial product referred to. You should also obtain the product disclosure statement relating to any financial product referred to and consider the statement before making any decision about whether to acquire the financial product.

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© Arnhem Investment Management, 2017