The First $100 Billion Drug

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Could this drug be the first $100 billion drug in the pharma industry? The biggest ever were the COVID vaccines at $30 billion in one year, and then AbbVie's Humira is about $20 $100 is like just eye-popping, right?

Right. Eye-popping and ear-popping. Welcome to the Barron's StreetWise Podcast. I'm Jack Howe, and the voice you just heard is Jeff Meacham. He's a drug analyst with BofA Securities, and in a moment you'll hear about what he thinks just might be the world's first $100 billion drug. He'll also explain why he upgraded Merck this past week and downgraded Pfizer, and he'll share his top big pharma and biotech stock picks right now. Listening in is our audio producer Jackson. Hi Jackson.

Hi Jack.

Hey listen, I just want to announce that Citrix is now going to be called Ladricks.

Are those Magic: The Gathering cards?

No, no, we already talked about that another episode.

This is a a drug developer whose shares recently sold for 11 cents apiece. The, the stock briefly hit $4 in early 2021. Also, another announcement: Respira has changed its name to Qnovia. That one is not publicly traded. It's run by a former tobacco executive with vape experience, and it's developing an inhaler that it says can be used for many things, including delivering nicotine to help people stop smoking. I mean, I took, I guess, what you call a contrarian approach many years ago when my kids were born. I stopped smoking by not inhaling any more nicotine. But okay, I'm not a doctor. I'm not a biotech executive. Anyhow, that company once again no longer called Respira. The CEO says there were too many companies with respi in the name, respi Jackson, the root on that?

Latin for breathe is my guess.

Okay, it was creating confusion. So now the name is Qunovia, spelled just like it sounds, with a Q followed immediately by an N. Also, the company formerly known as Adagio is now called Invivid, and Bone Therapeutics is now Biocenics. And if you're wondering Does BioCenex still make bone therapeutics? Well, yes, it does. These are a handful of examples of what the industry blog Fierce Pharma calls, quote, "A biopharma name-changing craze." And it's not just small biotechs. GlaxoSmithKline is now just GSK. And Pfizer has a new logo. It used to put its name inside a blue oval. And now it puts it next to a blue helix, kind of a spiral shape. I'm starting to wonder if that first potential $100 billion drug we'll be hearing about is for frequent uncontrollable rebranding urges. If you're a biotech executive who wakes during the night wondering whether a company name change to something starting with an X, maybe two Js and a thumbs up emoji would feel more investible, then 30mg of quit fiddling could be right for you. May cause vaping. Now, there's been a lot of upheaval in biotech over the past 4 years. If you owned the SPDR S&P Biotech ETF, the ticker there is XBI, you made 32% in 2019 and then 48% in 2020, and then you lost 20% in 2021. And another 26% last year. Basically, you were up big for a while there, and now you're back to a share price that the fund first hit in 2015. And around when the fund was riding high, a lot of companies came to market. Many of those were early-stage companies.

I've been doing this for 20 years in my career. Before, let's say, the pandemic, maybe had done a handful of IPOs of biotechs that were exclusively preclinical and like a year away from even going into their first-in-human. And that was almost every IPO for the past 2, 3 years. It's great because the science is super cool, but we just don't know whether it's going to translate to, you know, do these drugs clinically work better or not? I mean, jury's still out.

That's Jeff Meacham. He's a drug analyst at BofA Securities. And he says that the dramatic rise and fall in biotech had a lot to do with a broader shift in investor tastes. With the Federal Reserve raising interest rates to cool inflation and investors wondering whether that will soon lead to a recession, early-stage companies are out of favor. Mature companies with dependable cash flows are more popular, including some big drug companies.

Larger caps have done okay, but, um, I would say Last year, most of the big cap pharmas and big cap biotechs have in fact outperformed, not because the businesses have really done well, some of them have, but most of them are kind of mixed. It's because they're, you know, the macro is uncertain and it's a good safety space.

Jeff says that investors could sell big pharma stocks if the economy improves, but that he doesn't see that as likely over the next 6 months. He likes stocks with a mix of high quality and good growth potential. One of his favorites right now is Eli Lilly, which has a drug for diabetes that could win approval this year for obesity. We've talked about Lilly's drug and a similar one from Novo Nordisk before on this podcast. Jeff says this is one of the biggest clinical breakthroughs he's seen in his career.

There have been 50 years of failures in obesity, and all of a sudden Novo Nordisk has a drug which is 10 to 12%, 15% at the most weight loss. Lilly has a drug which is 22%, you know, gross, 20% net of placebo weight loss, which is just remarkable, right? And that same drug is now going to go into clinical trials for heart failure, for liver disease, for kidney disease. Diseases where obesity plays a big role, right? Maybe it's a secondary role, but it's still a big role.

Jeff says that broadening the use of Lilly's new drug could be the key to winning insurance coverage.

Obesity today is not broadly reimbursed, right? Only for bariatric surgery, and then you have to prove that you've been unsuccessful in various efforts to lose weight. That's going to change, I think, going forward, but Lilly had what they call a wall of data strategy. So if payers become really restrictive on obesity as the lead indication, well, then it could be approved for sleep apnea or chronic kidney disease or heart failure or NASH, which is liver disease. So they're— they try to sort of broaden the indication base, all of which include obesity as a common factor.

Jeff says that the benefits of Lilly's drug for these obesity-related diseases are significant.

A patient on this drug that is non-diabetic, just, you know, a straight obese patient, their blood pressure, their heart rate goes down more than if they're on a heart rate med. Their lipids crash almost more than if they're on a statin. Their blood sugar goes down as if they're on a diabetes medicine. It's not just about the weight.

Okay, so this drug is potentially a very big deal, but then Lilly's stock price has already soared. It's up more than 300% over the past 5 years, and it trades now at more than 40 times this year's earnings. So what makes Jeff bullish even at what seems like an ambitious price? He says the drug could be the biggest seller in history even without making particularly bullish assumptions.

We, we got a lot of flak. We, a few months ago, we published a note that said could this drug be the first $100 billion drug in the pharma industry. The biggest ever were the COVID vaccines at $30 billion in one year. And then AbbVie's Humira is about $20 billion. And the cancer drug Keytruda from Merck is thought to be $30 billion at peak. $100 billion is like just eye-popping, right? And the point of the exercise was to say, let's only give them 10% share and some of these diseases, let's only assume a US opportunity, nowhere else. Let's only assume 12 months on drug. Let's assume it's a 50% gross-to-net discount, same price as like a diabetes med. And using all these things, we got to a peak, you know, granted it's in 10 years' time, but like $100 billion. So it's a, it's not a trivial opportunity.

As things stand now, Lilly's earnings per share are expected to more than double between this year and 3 years from now, and estimates have been rising. All right. We just heard Jeff mention some of the other best-selling drugs in history, including COVID drugs and something called Keytruda from Merck. Let's take those in order. Pfizer made big headlines all through the pandemic, and I'm not talking about its sassy new helix logo. It and partner BioNTech developed one of the most successful and most used vaccines for COVID-19. It's called— well, it's called the Pfizer vaccine if you're a normal person, as in, did you get the Pfizer or did you get the Moderna? But technically, the Pfizer vaccine has a brand name, Comirnaty. The name is intended to be a mashup of COVID and community and immunity and mRNA, as in messenger RNA, as in the gene stuff. I'm not a member of the Comirnaty community. I got the Moderna, which, by the way, also has a brand name. And I kid you not, it is— well, let me tell you in the following dramatic scene. Hey Jackson, I've got this shot I have to give you. The brand name is Spikevax, but you just call it the Moderna vaccine. It's not— you're not going to feel a thing. It's going to—

what did you say earlier there?

Well, it's a spike vaccine, Moderna vaccine, so you won't— it'll be painless.

What are you saying?

I—

can you talk slower?

Spike vax, spike vax. Now let's get that sleeve rolled up.

Oh no.

And see, I feel like that's some of our best acting ever on this podcast. Now Pfizer has another drug, of course, for patients who have COVID, and that name is better known. Paxlovid. We've talked with Pfizer CEO Albert Bourla on this podcast about both of these drugs, and he said that COVID will continue to need regular booster shots. I just got my second booster. I have no particular opinion on why or what that does for me. I'm flying to Zurich for the Davos conference in a couple of weeks, and 8 hours on a plane sounds pretty COVID-y to me. But then I flew with a family to Florida for Disney World in August, and we all got COVID for the first time, and it wasn't that bad. Maybe because we all had our shots, I don't know. And I don't know if planes are COVID-y, and I don't know about optimal booster protocol. So send your angry emails on the subject to jackson.cantrell@barons.com. Anyhow, Jeff, unlike Dr. Bourla at Pfizer, isn't convinced that we're all going to keep getting COVID shots.

We've always been skeptical that people are gonna regularly get boosters, right, every year. Especially if the new strains of COVID or new variants are not that worrisome. People are already vaccinated, so they're probably just willing to stick it out as opposed to going to get a booster. So, booster demand and demand for the oral have kind of eroded. So, that's one negative for '23 and beyond. Not to say that those are still very cash flow positive kind of products, but you're coming off like a $50 billion revenue base. The question is like, how fast will it go down? Not like if it will go down, right?

How fast will it go down? I'll tell you, it says right here in Jeff's research, the decline in Comirnaty and Paxlovid combined this year from last year could be $32 billion. That's worse than the consensus estimate, which puts the decline at $25 billion. The COVID comedown is one part of what Jeff calls a double whammy facing Pfizer. So what's whammy number 2?

And then the second piece of it is really that the new products that they have in development, you know, like, like a big diversified pharma, they have a lot of new stuff going on. They're launching drugs in migraine, GI diseases like ulcerative colitis, you know, myeloma, which is a blood cancer, a bunch of stuff. But it's not really going to move the needle on kind of ex-COVID growth, right, until probably 2 years from now. And they have— you mentioned patent cliffs. I mean, they have their own patent cliff, 2025 to 2030. There's a bunch of things that could aggregate to be about $15 to $20 billion in revenue that is lost because of patents. So that's not a trivial hurdle to get over, right?

They could use one of those $100 billion drugs to fix that problem.

Exactly.

Jeff downgraded Pfizer stock to neutral from buy this past week, and he did just the opposite with Merck, upgrading it to buy. But Merck later this decade will face a key patent expiration of its own. Its Keytruda for cancer is one of the biggest-selling drugs ever. This year, its sales could grow 16% to over $24 billion. That's more than 40% of Merck's total projected sales. Keytruda could peak at $30 billion a year, but it will lose patent exclusivity starting in 2028. That's what analysts call a patent cliff, and investors don't like it. They don't like most things with the word cliff in the name, except Clif Bars. That company was bought by Mondelez last year. Where was I? Keytruda. Why would Jeff be bullish on Merck if it faces such a big patent cliff? For one thing, it trades at a reasonable 15x earnings, and earnings are still growing nicely. But also, Merck is developing strategies to keep Keytruda selling well beyond the patent cliff.

Keytruda is, it's immunotherapy. It sort of reactivates the immune system to recognize the cancer. And that's why there's a lot of development. It doesn't work in all cancers, but there's a lot of development of, you know, combinations, 2-drug, 3-drug combos with Keytruda. But Keytruda is sort of the foundation therapy, and then you can combine it with other mechanisms. There's a whole alphabet soup, right? Like TIM-3, LAG-3, CTLA-4, a lot of other immune sort of modulators. So the one-two punch may be better. And then Merck is also studying, you know, Keytruda in combination with other different technologies. So Moderna's mRNA technology, They're looking at bispecific antibodies. They're looking at cell therapies. The entire idea here is to maybe extend the runway beyond the patent, which expires in 2028 to 2030. Keytruda may in fact erode because of generic, but Merck will still get paid on the other components of a combination. It helps flatten the cliff, so to speak, or smoothen out the cliff a little bit.

Jeff has some other favorite biotech stocks. They're big companies, but not quite as big as the ones we just mentioned. Let's hear about those and Jeff's thoughts about the broader outlook for drug innovation. That's next after this quick break.

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Welcome back. Jeff from B of A was telling us about some drug stocks he likes and why. Another one of them is called Vertex Pharmaceuticals, which trades at about 18 times earnings with consensus estimates showing earnings growing by high single-digit percentages in the years ahead. Here's Jeff.

They have a, a core business in a rare disease called cystic fibrosis that, you know, this could be $12 billion in revenue. Um, by the way, it's like a, you know, 80-85% operating margin drug. I mean, it's shocking that you could sell $12 billion of drug product with 50 individuals, but it's an expensive rare disease drug and patients are on chronically. And so that really drives a lot of the margins.

Another of Jeff's picks is called BioMarin Pharmaceutical.

We just recently raised our price objective from $120 to $200, which is basically a double from here. Again, a rare disease company. They have, you know, 6 drugs in its portfolio that they're growing pretty nicely. They added a 7th called Vaxogo, which is a drug for achondroplasia. Think of it like a growth hormone deficiency. And then the real, like, juice here is Roktavian, and this is a curative intent drug for hemophilia. To put it in perspective, there's some patients with severe hemophilia that have to get injections of clotting factor 2-3 times a week for the rest of their life. With BioMarin's drug, they get one shot and then their clotting factor is normalized for 7 or 8 or 9 years. So, you know, the number of injections you're saving people per year is dramatic. It's going to cost like $2 million plus, but it's actually attractive economically because payers are probably made whole in 2 years or 3 years. You know, the 3—

they'd rather pay the $2 million than to get the, you know, twice weekly than $1 million per year for life.

Right.

And lastly, let me just give us a 10-year outlook, not financially, not on the stocks, but just what are some diseases out there where you see real signs of hope that are coming maybe a few years down the road for folks who might have one of these or know someone who does, and you're looking down the road and you're saying, wow, there's something that's really going to change things here and it's coming up?

Well, I would say, so in general, I mentioned obesity and Alzheimer's. Alzheimer's, despite the likely approval of Eisai and Biogen's drug, it's called Lecanemab, It's— there's still a lot of work to do, and I don't know if Lilly's Donanemab is going to be any better in Alzheimer's, but that, that's something where we've gone to the well on the same mechanisms. These are antibodies against a plaque in the brain called beta amyloid, but we need some newer strategies, right? So that's something where there's probably fertile ground for, you know, for novel approaches. Obesity, I think, is going to be really the for a few years, right? Commercially, like, how big could these drugs be is kind of the question. But to answer your question, you know, there's still a lot in the oncology and hematology space. There's been a ton of innovation in immunotherapy. I'll put it in perspective for you. So a patient years ago with melanoma probably had a 5 or 10% chance of living 5 years, and now that number is a 60, 70% chance of living. So The progress so far has been really remarkable. Not all tumors, not all cancers are like that. So lung, kidney cancer, prostate, breast cancer, still, there's still more work to do. That's where some of these newer technologies that maybe are a better mousetrap could really have an impact. But that's 5+ years down the road. But the stuff going on now, the various combinations, I think are going to really help some of these cancers that haven't really been served by the— by this innovation wave.

It's good to hear that about the progress. You know, uninformed people might, including and especially me, sit here sometimes, we think, just go in the lab and stare at the beakers for longer and spend a lot of money and come up with a pill and cure the damn thing already. You know, what's going on? So it's nice to hear that there is progress being made. Thank you, Jeff, and thank all of you for listening. Jackson Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. Follow me on Twitter, that's @JackHough, H-O-U-G-H. See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar. Where data speaks.