Picks for the quarter
Allergy Therapeutics: strong continued trajectory in both commercial and pipeline development;
CareTech: anticipation of earnings enhancing acquisitions;
Faron: Traumakine Phase III data readout;
Midatech: well funded, commercial traction and news flow catalysts in 2017
Neutral performance, geo-political risk, stockpicking: these are the watchwords for the UK healthcare sector, over the past two months and ahead into the next quarter.
Our market view
A combination of macro-events and increased political uncertainty – both in the UK and the US – means we anticipate a neutral performance from healthcare over the next three months. Stockpicking remains key with company specific events likely to drive some stocks well ahead of the crowd.
We are past the volatility seen at the end of 2016 and the start of 2017. In fact, towards the end of the last quarter, the healthcare sector broadly stabilized, albeit with performance behind the overall market.
Nevertheless, there are still unknowns, not least in the US following the unsuccessful repeal of the Affordable Care Act. With changes in this area now looking less likely, there’s renewed focus on pharma pricing in the States as well as in Europe. Pharma hasn’t been out of the news but the appointment of a new head of the Food and Drug Administration (FDA) deepens uncertainty, as does the upcoming UK election which will inevitably shine a spotlight on NHS spending.
Then there’s Brexit which continues to dominate the headlines, unanswered questions over the future location of the European Medicines Agency, the availability of grants from Europe and the National Institutes of Health, and potential changes to clinical trial expectations.
The importance of adaptive clinical trials
The recent appointment of Scott Gottlieb as head of the FDA was a crucial event in the world of healthcare. In our opinion, Gottlieb’s support for adaptive trials within the clinical development landscape is particularly interesting. Given the potential for a reduction in costs and time following adaptive development strategies, this is an important development.
In essence, an adaptive design is one which allows changes to the trial after it has started without undermining its validity. And so the time saving has the potential to deliver faster, cheaper drug development. Of course, this kind of process is still in the early stages – but the personnel change at the FDA is probably the best opportunity in years for the basis of the drug development cycle to be reset.
Heathcare funding activity in 2016/17
With just seven healthcare IPOs in 2016, it was a slow year – and the first quarter of 2017 showed no change in this trend with only one IPO. We expect conditions for the remainder of 2017 to remain broadly similar, with investors supportive of companies which are delivering on their stated strategies. However, we can’t rule out a fall in the current market appetite for appropriately positioned firms if wider events take hold.
Biopharma and Healthcare services
Following a weak end to 2016, Biopharma has recovered over the quarter and has outperformed the Lifesciences sector as a whole. Stocks broadly remained resilient to the shocks to the NASDAQ biotech, including the defeat of the ACA repeal and ongoing pressure on pharma pricing.
Meanwhile, over the past three months performance from the Healthcare services subsector has been weaker, partially reversing a particularly strong period at the end of 2016. But we expect M&A to continue across the sector and we believe it continues to be seen as a ‘safe haven’ post-Brexit.
Medical devices and diagnostics
Historically the least volatile and lowest growth segment of Lifesciences, medical devices and diagnostics have continued to underperform other subsectors. While companies which can demonstrate consistency of performance continue to trade at market premiums, we expect the pressure on share prices for those that may be in a less favourable financial condition to continue.
Given all the uncertainties we have outlined in this article, we believe that healthcare is unlikely to outperform in the near term. In particular, we are of the view that performance of the larger stocks is likely to remain muted. But there is momentum in the mid-market companies as specific company news flow drives shares. As such, we believe there are significant opportunities for stockpickers.
The Deep Dive: A Closer Look at Adaptive Clinical Trials
From a life sciences standpoint, the naming of the head of the FDA has been one of the most anticipated decisions of Trump’s presidency and the appointment of Scott Gottlieb was confirmed at a US Senate hearing earlier this month. As a result, there was plenty of scrutiny on Gottlieb’s background and – particularly from the Democrats during the Senate hearing – his ties with industry. One of the most interesting perspectives in our view is his support for adaptive trials within the clinical development landscape – this has been a subject of discussion for several years and with good reason, given the potential for the reduction in costs and time following adaptive development strategies.
Indeed, working groups have already been established for a number of years looking at adaptive design within PhRMA (Pharmaceutical Research and Manufacturers of America) and the US BIO (Biotechnology Industry Organisation). With President Trump’s earlier comments on faster and cheaper access to innovative medicines, we think the opportunity for further adoption of adaptive trials is likely to have significantly increased with Gottlieb’s appointment.
So why the interest in adaptive clinical trials?
An adaptive design is essentially one which allows changes to the trial – or to the statistical analysis of the trial – after the trial has started without undermining its validity. A crucial point here is that it does not mean that a trial can be changed arbitrarily at any time – there is a core principle that any changes must be pre-planned and conducted at pre-determined points within the trial. The kind of study features that can be adapted might include: subject eligibility criteria; randomization ratios; treatment arms may be dropped, modified or added to; endpoints or analytic methods may be changed; or studies may become ‘seamless’ through the combining two phases of development within one design. The cartoon illustration below, for example, show how an adaptive trial design allowing the dropping of treatment arms could be used to more rapidly deliver a phase III outcome vs a conventional clinical strategy.
The potential to deliver faster, cheaper drug development via adaptive trial design is hugely attractive and the impact on patients – particularly if fewer patients are required for a clinical programme – means that clinical resources also can be potentially deployed more efficiently. For cash-constrained development-phase biotechs this appeal is obvious. Much more problematic, however, are the challenges that come with designing flexibility into the development process which still allows correct statistical interpretation and the minimization of bias to avoid undermining the integrity of the trial.
One of the most significant hurdles for a small biotech is the significantly greater complexity that must be designed up-front into an adaptive design: even now, interim analysis within conventional trials is done relatively infrequently. Moreover, an adaptive design strategy also introduces an element of uncertainty into the clinical process which does not exist within a conventional trial – for small, development-phase biopharma companies it can make it particularly challenging to assure investors of timelines and overall cash requirement if the development programme has the potential to evolve.
Correspondingly, while the use of adaptive design trials has significantly increased in recent years, the rate is still low in absolute terms at circa 38 in every 10,000 trials during the period 2012-2013 (source: Hatfield I, Allison A., Flight L, Julious S.A. and Dimairo M. – Adaptive designs undertaken in clinical research: a review of registered clinical trials – Trials 2016: 17 150: 1273-1279). According to Hatfield et al, adaptive designs appear to be most commonly used in phase II trials and in oncology, with the most popular form of adaptation being group sequential design. However, the review also acknowledges it failed to capture all trials with adaptive designs, suggesting that the reporting of adaptive designs, such as in clinical trials registers, needs improving. Clinical trial registers currently do not contain sections dedicated to the type and scope of the adaptation, nor do they require that the term ‘adaptive design’ should be included in the trial title or summary – we think any early administrative changes post-Gottlieb might be seen in this area.
The issue of the adaptive pathways was also addressed within the BMJ during the summer of 2016 following an analysis article, ‘Adaptive pathways to drug authorisation: adapting to industry?’ (Davis et al, BMJ 2016; 354 doi: https://doi.org/10.1136/bmj.i4437). This analysis came in response to a pilot project conducted by the EMA (European Medicines Agency) to test a new model of drug testing and marketing (NEWDIGS, New Drug Development Paradigms), which then sparked a debate about the assumptions and evidence used by the EMA. Importantly, the EMA’s approach for adaptive pathways appears to place an emphasis on preliminary clinical data, surrogate outcomes and observational studies, combined with an assumption that new data on benefits and harms will ensue quickly once a drug comes to market. The analysis conducted by Davis et al questioned the capabilities of in-market registries and highlighted the advances needed in electronic health records before they could be used as a reliable resource for rapid assessment of drug safety.
In this regard, the industry is presently at the earliest stages of reviewing and revising the clinical design process, balanced by market demand, regulatory support and structural capabilities. Given the personnel change at the FDA, however, this is probably the best opportunity we’ve seen for several years for the underlying basis and demands of the drug development cycle to be reset.