Drug Industry's Secret Weapon: 'Guided Missiles'.

"A true home run in the drug industry is when a company develops a mega-blockbuster that transforms its finances for years.

But with Medicare trying to bring costs down by targeting the industry's most expensive drugs, a portfolio of medium-size moneymakers that can keep your name off the U.S. government's naughty list can be a wise strategy.

That is at least one reason why drug companies are investing heavily in biotech companies developing antibody-drug conjugates. Known as ADCs, these treatments work like a guided missile by pairing antibodies with toxic agents to fight cancer. In short, they enable a more targeted form of chemotherapy that goes straight into the cancer cells while minimizing harm to healthy cells.

Earlier this month, Merck and Daiichi Sankyo agreed to jointly develop and commercialize three potential ADCs in a deal worth up to $22 billion. That came after Merck was unable to come to an agreement to acquire Seagen, another ADC company that was snagged by Pfizer for $43 billion. While the three Daiichi ADCs in the Merck deal are promising, they aren't going to be blockbusters. 

Akash Tewari, an analyst at Jefferies, sees peak sales for each drug in the hundreds of millions of dollars. A drug is considered a blockbuster if revenue exceeds $1 billion annually.

A silver lining of having a portfolio of medium-size moneymakers is that it keeps your drugs from earning a spot on an ever-growing list of top-selling drugs selected later in their life by Medicare for negotiation. 

Under the Inflation Reduction Act, Medicare will be able to negotiate the prices of drugs it spends the most on and that don't face competition from less-expensive copies. 

"A portfolio of smaller assets feels more fitting, portfolio risk-wise, for the era of the Inflation Reduction Act," wrote Daina Graybosch, an analyst at Leerink Partners, after the Daiichi deal.

There are other provisions in the IRA that encourage ADC investments as well. For one, because they are complex biologics, they will be protected for longer than regular medicines. Price negotiation for small molecule medicines is allowed nine years after Food and Drug Administration approval compared with 13 years for large molecule biologics. In addition, because they are so complex to make, they might avoid competition from copycat biosimilars well after their patents have expired, explains Andy Hsieh, an analyst at William Blair.

"When you produce biologics, even a slight temperature change can give you vastly different drug products," Hsieh says. "At least in the near term, big pharma doesn't see any sort of biosimilar encroachment into the field."

The growing focus on ADCs, after an era during which Merck's financials have been dominated by a single cancer drug, Keytruda, makes sense. Sales of Keytruda, which faces patent expirations later this decade, grew 17% in the third quarter to $6.3 billion, Merck said on Thursday. That represents nearly 40% of the company's total revenue of $16 billion for the quarter. For the year, analysts expect Keytruda to bring in close to $25 billion in sales. That makes it the bestselling drug in the industry this year and means it will likely be selected for Medicare negotiation this decade. Merck had its diabetes drug Januvia selected in this year's list and has filed a lawsuit challenging the U.S. government's plan to negotiate drug prices.

One reason most ADCs aren't likely to become mega-blockbusters like Keytruda, a cancer immunotherapy that earned 35 approvals across 16 types of cancer, is that they aren't one-size-fits-all drugs. Instead, they are designed to target a specific protein that is expressed on the surface of a cancer cell. That means each drug is made with an antibody targeting a subset of cancer. There are more than 100 ADCs being tested in humans by drug and biotech companies.

While the first ADC was approved in 2000 for acute myeloid leukemia, interest has been lukewarm for much of the past two decades due to technical difficulties, including the ability to properly link the antibodies to the toxic payloads. As the technology has been refined, interest picked back up in recent years, with companies such as AstraZeneca and Gilead Sciences joining in.

New drug pricing laws have made an appealing technology even more attractive." [1]

1. Drug Industry's Secret Weapon: 'Guided Missiles'. Wainer, David.  Wall Street Journal, Eastern edition; New York, N.Y.. 27 Oct 2023: B.10.