Submitted by The Life Sciences Report as part of our
was conducted by
The Life Sciences Report
The myth of technology, whether for smartphones or cancer
treatments, is that the next big thing appears suddenly and
magically. Casey Research Analyst Alex Daley sets the record
straight in this exclusive interview with
The Life Sciences Report
While the science of genetic medicine has accelerated the process
of turning magical thinking into practical medicine, Daley cautions
investors in biotech and medical device companies to be patient,
and names companies with innovative technologies poised for
The Life Sciences Report:
At Casey Research's "Navigating the Politicized Economy" summit,
you talked about the difference between the speed of science and
the speed of technology, and how quickly the time to market and
cost of products in the life sciences space is decreasing. Can you
provide some examples?
Many technologies, like the touch-screen tablets and smartphones
that now dominate the market, seem to come out of nowhere,
perpetuating the myth of technology as almost magical. But you only
have to look as far as the as-yet-unfulfilled promises of recent
years to see the slow development curve that leads to explosive
growth. This has been most noticeable in the advent of genetic
We all remember the sequencing of the human genome as a
scientific milestone. Announced in 2000, just at the turn of the
millennium, it was followed by much media fanfare about the dawn of
genetic medicine. Every untreatable disease was going to be cured.
Every person was going to receive medicine tailored to his or her
Yet, more than a decade later, that promise remains almost
entirely unfulfilled. It's not that the science has stood still.
Quite the opposite: It has been moving forward at blazing speed.
The original human genome project, which sequenced a single
person's genome to 92%?including everything but some particularly
difficult areas?took 13 years and cost more than $3 billion ($3B).
It was a monumental advancement, but not practical for everyday
Over the last decade the cost of genome sequencing has fallen
far faster than many predicted. We've gone from taking 13 years to
taking just about one day to sequence a whole genome. And the cost
has fallen from billions to thousands of dollars. We've now
sequenced tens of thousands of genomes for scientific research, and
with the falling price that number is skyrocketing. We have built
an amazing scientific base for study, and driven down costs to make
it viable for mainstream use. All of that had to happen before
genetic medicine could even begin to crawl forward?precisely what
is happening now, with the advent of the first U.S. Food and Drug
Administration (FDA)-approved antisense drug and other genetic
milestones just being reached.
Just as the plasma TV (invented in the 1930s), the LED light
(1960s), the industrial robot (also a child of the '60s), the
touch-screen interface for computers (early 1980s) and other
inventions we think of as thoroughly modern took decades to go from
the lab into our everyday lives, it will take considerable time for
genetic medicine to fully develop. But the pace is ever-increasing
and advances happen at an astounding rate. The decrease in time
needed for gene-sequencing, for instance, far outpaced the
development of computer chips in terms of cost/speed, as in the
famous Moore's law (predicting a doubling of circuit capacity every
What is the role of FDA in that race to market? Is it a speed bump,
a safety crew or something else?
The FDA exists exactly as a speed bump. Those derisive descriptions
of its role are, of course, correct, but also a bit wrong-headed.
It's like complaining about a speed bump in front of an elementary
school because you want to drive 90 miles per hour on that road.
You simply cannot.
Left to our own devices, we humans can accept a lot of
collateral damage. Put us into a collective like a corporation (or
an army) and the sociopathy is amplified a hundred-fold. It makes a
lot of sense for society to erect some reasonable barriers, rooted
in scientific proof, at the entry to the market for experimental
and potentially dangerous drugs. One only has to look back at the
last few decades, replete with horrible tragedies like that of
thalidomide, which caused hundreds of babies to be born with
horrible birth defects, to see the need for ample study. And the
recent results from trials conducted in other countries, now
discarded because the numbers were faked, is a reminder that the
desire to cut corners continues to this day.
I see the FDA as a necessary evil. As with any bureaucracy
established to monitor progress in a civilized society, the balance
between usefulness and hindrance tends to take on an ebb and flow.
Over the past decade the FDA has become increasingly conservative
and lengthened the burden of bringing new drugs to market. That's
partially a result of our society's litigiousness. But it is also a
reaction to the fact that more categories of drugs, behind which
the very science is novel, are in the pipeline than ever
I see the FDA listening actively to corporate concerns about
efficiency and cost. It has taken a number of steps to make the
process clearer, cleaner and faster without sacrificing important
hurdles on proving both safety and efficacy. I applaud the FDA for
the work it does for us as consumers, and for trying to balance
that mandate with the need for a vibrant market filled with
innovation. There is a reason America is still, by far, the leading
bio/pharma innovator in the world.
You also talked about robotics at the Casey conference. Do you like
medical devices as an investment because they have faster approval
timelines? Are there breakthroughs in the space that could release
a flood of new products in the near future?
Medical devices are an excellent place for investment, if you
understand the market well. It is a fundamentally different market
than the drug development market, and driven heavily by
consolidation of late. The leaders of that business are mega-caps,
like Medtronic Inc. (MDT:NYSE) with insulin pumps, Stryker
Corporation (SYK:NYSE) with pain pumps and other devices, and
increasingly Johnson & Johnson (JNJ:NYSE), which has been
acquiring heavily in the space. J&J recently purchased
Guangzhou Bioseal Biotech Co., for instance, which makes a
porcine-based sealant used by surgeons to control bleeding. It also
purchased Synthes Inc., which makes implants to aid in bone
healing, as well as a number of other devices.
Many have complained that the levy in the "Obamacare" (Patient
Protection and Affordable Care Act) legislation package of a
royalty tax on the gross proceeds of all medical device sales will
hinder innovation. To some extent that is true?all targeted taxes
have exactly that effect. But those economists, and the companies
involved, see how absolutely huge the opportunity is. With a
current global market for medical devices approaching $300B
annually, and a projected growth rate that is double the speed of
drug development, there is no shortage of investment in this
That investment is resulting in major advances in materials,
hybrid biomechanical systems and sensors. The latter is one of the
most promising areas, with huge advances in wireless, implanted
sensors to help monitor chronic conditions. As the prices of such
systems fall, multibillion-dollar opportunities open with regard to
heart disease, diabetes and other, less common chronic
From an investment perspective, there is still a gap between the
public and private markets for medical devices. You can find a
number of small medical device makers, such as NxStage Medical Inc.
(NXTM:NASDAQ), with profitable niche markets. But I think that over
the next decade investors will find most of the growth in profits
from the sector?which, yes, has faster approval times, but also
carries much higher costs of distribution, service and support?to
be in large caps. In particular, I think medical devices will drive
much of the growth at Johnson & Johnson. Smith & Nephew
(SNN:NYSE) is also well positioned.
Are we at the limit of what small molecules can do? How will
development of treatments that take advantage of more complex
lipids and proteins change how we treat disease?
There is no limit to what small-molecule drugs?the traditional
chemical-industry born pharmaceuticals we are accustomed to?can do.
But they are just the tip of the iceberg. We are walking pools of
organic substances?amino acids, proteins, lipids, cholesterol
etc.?with their large and complex molecules. And that is the next
major phase of medicinal development?tapping into our biological
systems to cure and prevent disease. There are now more biological
compounds in the FDA approval pipeline than traditionally
discovered small-molecule drugs. That is just a preview of the
shifting balance between small- and large-molecule drugs.
In the first phase of what promises to be a sea change in
medicine, we are taking advantage of our bodies' natural systems to
aid in the delivery of small-molecule drugs. Our immune systems are
incredibly powerful, and have many tools to keep inorganic
substances out of our bodies. By wrapping these molecules in
proteins or lipids that are familiar to our bodies, we can
oftentimes deliver drugs more effectively.
Following that is the introduction of targeted proteins to mimic
natural functions. If we can successfully reproduce the proteins
put out by our own ribosomes and through other processes, we can
modify bodily functions, potentially interfering with, for example,
the plaques that build up and cause Alzheimer's disease.
Then genetic medicine follows from that, in which we interfere
with the processes of genetics to turn off (or "silence")
misbehaving genes, or to turn on dormant ones. For instance, a
large branch of regenerative medicine is studying how to
temporarily suspend the genetic mechanism that causes mammals to
scar instead of regrowing limbs via blastema, as our ancient
predecessors once could.
A number of companies are looking at creative ways to deliver
targeted chemotherapy. What breakthroughs do you see in this
There are two very specific breakthroughs here of interest.
The first is the recently approved use of antibody-drug
conjugates (ADCs). Seattle Genetics (SGEN:NASDAQ) is the leader in
this space, and its ADCs are created by bonding traditional chemo
with antibodies selected from our own bodies that target very
specific cancer cells. Chemotherapy, which is known as the "poison"
in the oncological
"slash, burn, and poison," does precisely that to the entire body,
causing horrific side effects in many patients. By piggybacking on
the body's own mechanism for targeted immune response, chemotherapy
can be rendered basically inert except when it comes in contact
with cancer cells. This means more chemo can be delivered safely,
working wonders on metastatic cancers and other
difficult-to-target, small, multiple-growth cancers.
On the other side is a much smaller and lesser-known company
with an FDA decision pending on a liposome-wrapped chemo that will
advance the treatment of large solid tumors in much the same way.
It is a much simpler mechanism of action. Celsion Corporation
(CLSN:NASDAQ) wraps current market-leading chemos, like
Doxorubicin, inside a fat molecule, rendering them much less potent
in the bloodstream. Once the chemo is distributed throughout the
system, a radio-frequency device is aimed at the area of the tumor,
cracking open the delivery vehicles and causing the chemo to attack
that local area. It is like combining the best aspects of radiation
(targeting) with the best aspects of chemo (effectiveness). The
therapy is still pending final review, but we believe, given the
data we have seen, that it is very likely to see approval late this
year or early next.
The first RNA interference (RNAi) antisense treatment, which
targets on-off switches in genes?a discovery that won the Nobel
Prize in 2006?was approved by the FDA this year. Could this open
the floodgates for companies working in this space? Will companies
that enter the space later benefit from the trails blazed by the
first ones out of the gate?
It'll start with a trickle, more than a flood. But make no mistake:
RNAi, or temporary gene silencing through interference with the
messenger RNA that signal cell behavior, looks to be one of the
most important genetic treatment methodologies yet conceived.
Genetics are at the root of just about every major chronic
disease?heart disease, cancer, diabetes. Gene silencing has serious
promise with regard to controlling the root causes and
predispositions for some of these maladies, instead of waging
continuous battles against symptoms, as we do today.
For instance, Kynamro, from Isis Pharmaceuticals Inc.
(ISIS:NASDAQ), is the first antisense/RNAi therapy to have a new
drug application accepted by the FDA. With Kynamro we have a
treatment for one of the most severe heart disease-linked genetic
maladies, familial hypercholesterolemia, the name of which should
be self-explanatory even if you cannot exactly parse the medical
terminology. Kynamro helps block the action of certain genes known
to contribute significantly to excess low-density lipoprotein (LDL
or "bad" cholesterol) levels in these patients, who previously
could do little to temper their predisposition to coronary artery
These kinds of highly targeted genetic treatments may hold keys
to silencing the growth factors that make cancer run rampant and
uncontrolled, or may control the buildup of the brain plaques I
mentioned earlier, which have links to Alzheimer's. They even show
promise in being able to silence some of the designed obsolescence
symptoms we refer to as aging?a condition fully rooted in our
However, RNAi is a very young science. The tools that discover
the genetic links are advancing rapidly, and we are at the cusp of
much larger and more frequent discoveries. Still, much of the
genetic machine remains a complete mystery to scientists, and that
knowledge gap will slow the creation of gene-silencing
The companies best positioned in this space have decades of
technology in their pipelines, and strong intellectual property to
ensure their investors are the ones to benefit most from the slow
but steady revolution in this science. While many major drug
companies are working in this space, nearly all of them rely on the
science and intellectual property (
) from two firms to make progress (and these two firms have quite
rich pipelines of their own): Isis Pharmaceuticals, whose antisense
discovery platform is the gold standard; and Alnylam
Pharmaceuticals Inc. (ALNY:NASDAQ), whose founding team includes
one of those Nobel prize winners you mentioned. Alnylam has the
most advanced technology for delivering these drugs, which every
discoverer will need to get to market.
What about the prospects for pathway inhibitors? Do you see major
breakthroughs in 2013? Which companies will get treatments to
This is a much more narrow space than RNAi, but equally exciting
because of its potential to change the treatment regimen for
certain cancers in the short term. Pathway inhibitors promise to
interrupt the signaling pathways that cancer uses to tell itself to
grow, effectively stunting the spread of malignancies. Cellular
biologists and oncologists have been studying these mechanisms for
decades, and have discovered some that are particularly unique to
A small company named Curis Inc. (CRIS:NASDAQ) holds the most IP
in this space and was behind the announcement early this year of
FDA approval for Erivedge, an inhibitor focused on the "hedgehog
pathway" for treatment of basal cell carcinoma, a previously
difficult-to-treat and disfiguring cancer. The company has a rich
pipeline of drugs based on the same science in various stages of
development. In essence, Erivedge is the tip of a chevron strategy
for tackling cancer with this technique, which promises to slow or
stop cancer growth, buy critical time for treatment via other means
and preserve precious time for patients and their families.
Pathway inhibitors are a perfect example of the continued
relevance of small molecules in the biological world. These
traditional drugs took a very biotech path to market, but are
nonetheless more similar to the drugs of yore in mechanism of
action than they are to complex genetic and protein therapies. Not
every drug going forward will be a biologic.
You called 2012 one of the single most exciting years to be in
technology, particularly the $750B drug space. What are your
predictions for the life sciences sector in 2013?
2012 brought many firsts in biotechnology: antibody-drug conjugates
widely marketed, antisense drug approval and marketing, a pathway
inhibitor widely marketed. There are 20 other such milestones we
don't have time to list as well. And the combination of all that
excitement has had the effect of floating the entire sector much
higher. Average valuations are up. The volatility of progress and
setbacks are both amplified considerably. This kind of
high-potential, high-energy market brings with it new risks.
One risk is that considerable disappointment and malaise lie
ahead, as the inevitable slow creep of technological development
sets in?pushing the sector sideways or even down considerably as
the impatience of a largely short-term-minded Wall Street weighs on
shares. In many cases the discoveries of 2012 were purely
scientific. It takes time for science to make its way into
marketable technology?and it rarely meets the overexuberant dreams
of prognosticators in its capabilities.
As investors, it is critical we remember to invest with
realistic goals and timelines. Cut the consensus forecast in half.
Then do it again. If the company still looks cheap, maybe then you
have a great investment.
In our portfolio, we are concentrating heavily on mature
technologies that are on the cusp of the market. It is a dream
market for stock pickers in that area right now. With such a rich
pipeline of discoveries, we are able to uncover severely
undervalued companies with near-term catalysts for share price
growth. That is the strategy that will serve biotech investors best
for the next few years.
Alex, thank you for your time.
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Casey Extraordinary Technology Newsletter
Alex Daley is the senior editor of
Casey's Extraordinary Technology.
In his varied career, he has worked as a senior research
executive, software developer, project manager, senior IT
executive, and technology marketer. He is an industry insider of
the highest order, having been involved in numerous startups as an
advisor to venture capital companies. He is a trusted advisor to
the CEOs and strategic planners of some of the world's largest tech
companies. And he's a successful angel investor in his own right,
with a long history of spectacular investment successes.
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