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NEWSLETTER JULY 2012
TABLE OF CONTENTS
HEALTHCARE MARKET REVIEW AND OUTLOOK .... 1
WHERE DRUGS MEET DEVICES – NEW TECHNOLO-GIES HIGHLIGHT SYNERGISTIC VALUE .............. 4
ABOUT SECTORAL ASSET MANAGEMENT ......... 12
HEALTHCARE MARKET REVIEW AND OUTLOOK
Keeping pace with the ongoing European fiscal drama,
risk appetite fluctuated during the quarter, first
driving global equity markets down before rebounding
in the second half of June. In the end, the MSCI World
Index dropped 5.6% during the quarter, erasing most
YTD gains. In this volatile environment, healthcare
stocks lived up to their defensive role, with the MSCI
World Healthcare Index ending the quarter up 1.1%,
leaving the sector ahead of global markets YTD.
Within the group, big pharma held its ground, while
most risky subgroups, such as small caps, emerging
market healthcare stocks, generic players, and
medtechs, lost more ground. The sole exception was
mid- and large-cap biotech, which rose by 4.5% (as
measured by the MSCI World Biotech Index), thanks to
a particularly positive news flow.
The most anticipated legal / regulatory decision came
in the last days of the quarter, as the US Supreme
Court ruled 5-4 to uphold the Affordable Care Act
(«ObamaCare»), asserting that the individual mandate
was a constitutionally sanctioned tax. Thus, the law
will essentially stand as it is. No additional effects on
pharma, biotechs, generics, and medtechs are
anticipated from the June 28 announcement; the
levies will remain, and the industry can now look
forward to increasing volumes in the years ahead. The
decision is a slight negative for managed care, as
HMOs will have to take on both good and bad risks.
Hospitals stand to benefit from the higher volumes
and guaranteed payments.
The best performers during the quarter were mid- and
large-cap biotech stocks. Their performance was
driven mainly by a couple of positive regulatory
decisions, including an FDA advisory committee’s
recommendation for lorcaserin (Arena) and its
subsequent approval by the agency, another advisory
committee recommendation for carfilzomib (Onyx),
and a number of meaningful positive clinical events.
Among them were very strong phase II data for GS-
7977 (Gilead) in combination with Bristol’s daclatasvir
ANNUALIZED VOLATILITY
1 MONTH 3 MONTH 6 MONTH 9 MONTH 12 MONTH 3 MONTH 6 MONTH
MSCI World Index 134.1 4.9% -5.6% 5.7% 13.2% -6.5% 15% 16%
MSCI World Healthcare Index 145.8 6.2% 1.1% 8.8% 17.4% 5.4% 12% 12%
MSCI World Pharma 124.2 7.2% 2.4% 6.3% 16.0% 6.6% 11% 12%
MSCI World Biotech 274.9 3.2% 4.5% 19.4% 30.0% 21.0% 18% 20%
MSCI World Equip and Suppl 144.8 5.6% -2.1% 10.5% 13.4% -2.2% 14% 15%
MSCI Emerging Mkt Healthcare 365.5 6.2% -0.5% 14.3% 10.6% -8.9% 15% 16%
CLOSE
6/30/2012INDEX
RETURN
NEWSLETTER SECOND QUARTER 2012
Page 2
in GT1 hepatitis C, positive interim and final phase II
data for Kalydeco and VX-809 in F508del cystic fibrosis
(Vertex), positive phase IIb data for baricitinib in
rheumatoid arthritis (Incyte), and favorable phase III
data for a number of compounds: macitentan in
pulmonary arterial hypertension (Actelion), Xiaflex in
Peyronie’s disease (Auxilium) and T-DM1 in breast
cancer (Immunogen). In addition, the strong launches
of Eylea (Regeneron), Kalydeco (Vertex) and Jakafi
(Incyte) contributed to the positive undertone. Also,
we note Biogen-Idec’s positive pipeline update and,
last but not least, continued M&A activity, with the
key events being Astra’s bid for Ardea, Glaxo’s
interest in Human Genome Sciences, and Bristol and
Astra’s acquisition of Amylin Pharmaceuticals.
However, the quarter was not devoid of upsets and
disappointments. The positive phase IIb data of
Lucentis and Ophthotech's Fovista in wet AMD was a
negative for Regeneron’s Eylea. Celgene stunned the
market with the withdrawal of its European filing for
front-line and maintenance applications for Revlimid,
thereby eliminating the company’s main source of
organic growth for the foreseeable future. Lastly,
Roche abandoned its bid for Illumina, a decision we
did not expect.
The rest of the year should remain rich in events for
biotechs. The focus will remain on a couple of key
new product launches including Provenge, Esbriet,
Eylea, Jakafi, Adcetris, Dificid, Bydureon, and
Kalydeco. In addition, multiple regulatory decisions
are expected, among them a number of blockbuster
opportunities that should help sustain investor
interest in the sector. Finally, we expect
the fall meetings in oncology and
virology to be key catalysts, as several
companies plan to release important
data.
In medtech, the second-quarter events
essentially confirmed the trends noted
earlier. The business environment
appeared to stabilize, but volume and
pricing trends continued to be unclear,
and Europe remained weak. There were
a couple of meaningful FDA advisory
panel recommendations, including
Heartware’s HVAD, Edward’s Sapien heart valve for
high-risk patients, and Cameron Health (Boston
Scientific) subcutaneous ICD system for sudden
cardiac arrest. We expect economic conditions to
remain key performance drivers for medtech stocks in
the months ahead, along with regulatory decisions for
Heartware’s HVAD, Edward’s Sapien heart valve,
Dexcom’s Gen IV sensor and Insulet’s EROS insulin
pump.
Generic drug makers in Japan saw a sharp increase in
April sales following the release of new incentives for
increasing the use of generic drugs. Fiscal Q1 results
will be key later this summer. In Europe, conditions
remain very difficult for generic drug makers, as
volume gains have not compensated for price cuts. In
the US, Teva recorded a key win for its Copaxone
patents, delaying generic competition until at least
2015. Finally, Watson announced the rumored
acquisition of Actavis, which should rapidly be
accretive. Actavis also scored a victory with their
approval of a generic for Adderall XR, one of Shire’s
key assets.
Pharma stocks continued to tread water; the only
notable events were the failure of Roche’s
dalcetrapib for the treatment of high cholesterol and
the surprising pushback (again) from the FDA on
approving Pfizer/Bristol-Myer’s best in class
bloodthinner Eliquis. Dalcetrapib marks the failure of
the first of the industry’s two most potentially
meaningful new product categories with clinical data
this year. The second will be Alzheimer’s disease –
DRUG COMPANY INDICATION
Linaclotide Ironwood IBS-C and Chronic Constipation
AMR-101 Amarin Very High Triglycerides
Carfilzomib Onyx Refractory Multiple Myeloma
Quad Gilead HIV
Degludec Novo Nordisk Type II Diabetes
Abraxane Celgene Non-Small Cell Lung Cancer
MDV3100 Medivation Prostate Cancer
BG-12 Biogen-Idec Multiple Sclerosis
Ponatinib Ariad Refractory CML
Oral Remodulin United Therapeutics Pulmonary Arterial Hypertension
POTENTIAL BIOTECH DRUG APPROVALS IN 2012
NEWSLETTER SECOND QUARTER 2012
Page 3
with Elan, Johnson and Johnson and Pfizer’s
bapineuzumab and Eli Lilly’s solanezumab - which will
read out during the second half of the year. Finally,
we also expect to see further news from Glaxo’s
respiratory portfolio: positive initial phase III data for
the LAMA/LABA program were released on July 2nd.
In addition, we anticipate strong underlying demand
for mid- to high-tier hospitals in Asia and other
emerging regions. As expected, corporate activity is
high, and we should see IHH, the owner of Parkway
Hospitals (Singapore, Malaysia and Turkey) go public
in the next several months.
The caution we expressed after the strong Q1
performance of global markets was warranted.
Following the retreat observed during Q2 and the
incrementally positive developments in Europe at the
end of June, we feel a little bit more optimistic about
market conditions for the next couple of months.
Therefore, we are comfortable keeping our focus on
biotechnology, generics, and medical technology
stocks at the expense of big pharma. Even after the
relatively strong YTD showing of biotech stocks, we
continue to see the greatest potential for those
biotech companies on the cusp of a new product
launch or early in the launch phase. We expect the H2
2012 events highlighted above to be key performance
drivers. Among medical technology companies, we
remain committed to innovation-driven players able
to demonstrate the clinical value of their products.
Generics are a key component of our strategy,
particularly those companies with exposure in
emerging markets and Japan. We also are
incrementally more favorably inclined toward global
players, such as Watson (following the Actavis
acquisition) and Teva (after the Copaxone patent
ruling), which are both trading on attractive terms.
Finally, we favor using dips in emerging markets to
strategically add to exposure.
Michael Sjöström, CFA Chief Investment Officer
Based on Sectoral estimates / median numbers
SALES EPS PE12E EV/SALES12E COGS
Pharmaceuticals 2-4% 4-6% 12x 2.8x 15-20%
Generics 10-15% 10-15% 12x 2.0x 25-55%
Biotechs 15-20% 20-25% 14x 5.3x 10-20%
Medtechs 10-15% 15-20% 14x 2.4x 20-40%
GROWTH P.A. 2011-2014E
NEWSLETTER SECOND QUARTER 2012
Page 4
WHERE DRUGS MEET DEVICES – NEW TECHNOLOGIES HIGHLIGHT SYNERGISTIC VALUE
Over the last few decades, medicine has been
transformed fundamentally by the advent of
minimally invasive devices, more precise diagnostic
tools, and better-targeted drugs for specific
pathological conditions. While this evolution has
occurred largely in silos, there has also been a keen
interest in leveraging existing knowledge to combine
multiple modalities to improve treatment outcomes.
In this report, we describe some of the recent
advances in medical technology and biotechnology
through which substantial therapeutic synergies may
be extracted, as well as offer a glimpse into the
future of such approaches.
CARDIOVASCULAR MEDICINE
The field of cardiovascular medicine has undergone
substantial changes with the introduction of new
anticoagulants, lipid-lowering drugs, and
interventional approaches in the treatment of
vascular compromise (most notably in the coronary
arteries).
CORONARY AND PERIPHERAL VASCULAR
The introduction of bare-metal stents was the first
attempt at improving coronary blood flow in patients
with substantial atherosclerotic burden, including
those with ruptured plaques in acute myocardial
infarction. Despite the considerable controversy that
emerged over the appropriateness of such treatment
in low risk, stable subpopulations, stents have
substantially modified the treatment algorithm, which
originally consisted of drugs designed to prevent
plaque build-up and stabilize existing plaques, as well
as anti-clotting agents developed to reduce the risk of
vascular occlusion upon plaque rupture. Adding an
anti-neoplastic medication to the stent was
subsequently shown to diminish the risk of restenosis,
thereby improving survival. This development led to
a dramatic market conversion to drug-eluting stents,
benefiting companies such as Abbott, Boston
Scientific, JNJ, and Medtronic. Today, the total
worldwide coronary stent market is estimated at
USD6bn. Worth noting is that bare-metal stents have
remained the leader in the peripheral vascular
market, as multiple drug-eluting stent trials have
failed to demonstrate clinical improvement. The only
drug-eluting stent that has received an FDA approval
for the treatment of peripheral lesions is Cook’s Zilver
PTX. It remains to be seen whether this platform will
gain broader adoption in the interventional
community.
In the future, the stent market is likely to see
increased use of anti-neoplastic drugs at the expense
of permanent device implantation. While the greatest
advances have historically occurred in the coronary
arteries, positive data on the use of drug-eluting
balloons in the peripheral arteries suggest an exciting
new application.
Figure 1: Zilver PTX data. Source: Cook Medical.
ZILVER PTX 12 MONTHS 24 MONTHS
Primary Patency (PSVR <2.0) 83.1% 74.8%
Provisional Stenting Primary
Patency (PSVR <2.0)89.9% 81.2%
Event-Free Survival 90.4% 86.6%
ZILVER PTX 12 MONTHS 24 MONTHS
Overall
Primary Patency (PSVR <2.5) 86.2%
Freedom from TLR 91.1% 84.3%
Patient Subgroup Primary Patencies (PSVR <2.5)
Diabetics 86%
Diabetics with Long Lesions 77%
Long Lesions (>15cm) 77%
In-Stent Restenosis 80%
SINGLE ARM TRIAL
RANDOMIZED TRIAL
NEWSLETTER SECOND QUARTER 2012
Page 5
CR Bard’s acquisition of Lutonix in 4Q11 was the most
CR Bard’s acquisition of Lutonix in 4Q11 was the most
recent sign of increasing activity in this area. The
early data from this promising technology was
presented at the 2010 Transcatheter Cardiovascular
Therapeutics Conference. If successful, this therapy
could lead to a dramatic market conversion away
from the use of bare-metal stents in peripheral
lesions and possibly even drug-eluting stents in the
coronary arteries. CR Bard estimated that the value of
this market could reach USD1bn over the next
decade. Interestingly, this technology is likely to be
limited to lesions with low calcium burden, as drug
diffusion through mineralized tissue is difficult and
will likely result in poor outcomes. In such cases, a
pre-treatment with mechanical atherectomy may be
warranted to remove the calcified plague and allow
for effective drug delivery. At present, the greatest
benefactors of such a paradigm shift would be
Covidien and Cardiovascular Systems, with the
market-leading devices. Indeed, the potential for
treatment synergies motivated Bayer, which develops
drug-eluting balloons, to acquire Pathway Medical
Technologies in 3Q11.
CEREBROVASCULAR
Another closely related field, which traditionally has
been served solely by medical therapy and could soon
experience a sea change through the introduction of
treatment-augmenting devices, is ischemic stroke. In
Figure 2: Lutonix drug-eluting balloon data: Levant I
Late Lumen Loss at 6 Months. Source: Lutonix.
Figure 3: The Silverhawk plaque excision system.
Source: Covidien.
Figure 4: The Solitaire clot retrieval system. Source: Covidien.
0.461.09
0.45
1.19
0.490.9
0
2
MOXY PTA MOXY PTA MOXY PTA
mm
P= 0.016
N=39
Balloon Group
0.461.09
0.45
1.19
0.490.9
0
2
MOXY PTA MOXY PTA MOXY PTA
mm
P= 0.016
N=39
Balloon Group
Stent Group
0.461.09
0.45
1.19
0.490.9
0
2
MOXY PTA MOXY PTA MOXY PTA
mm
P= 0.016
N=39
Balloon Group
N=35
N=31
N=24
N=8
N=11
Stent Group
0.461.09
0.45
1.19
0.490.9
0
2
MOXY PTA MOXY PTA MOXY PTA
mm
P= 0.016
N=39
Balloon Group
N=35
N=31
N=24
N=8
N=11
Stent Group
NEWSLETTER SECOND QUARTER 2012
Page 6
these events, a clot, which may originate in the
cranial vasculature or at a downstream location, leads
to target vessel occlusion, which inadvertently causes
neural damage. With nearly a million incidences of
ischemic stroke in the US alone, this condition has
long received considerable attention from researchers
and clinicians. However, treatment progress has thus
far been limited to the use of intravenous or
occasionally intra-arterial tissue plasminogen
activator (tPA), delivered in a narrow time window
from stroke onset.
Recent advancements in mechanical clot extraction
and revascularization appear to offer an effective
first-line treatment option in selected cases. Data
from Covidien’s Solitaire and early data from
Stryker’s Trevo clot-retrieval devices are the most
notable reports of superior efficacy and safety that is
comparable to the current standard of care.
Based on early clinical experience, the FDA granted
approval for the use of Solitaire in ischemic stroke
patients who are not candidates for anti-coagulation
in 1Q12. This device, along with others, has already
been in use in the EU, although the additional clinical
data provide much needed support for clinicians to
employ this technology on a wider basis. In the
future, we may witness nationwide efforts to better
coordinate interventional care for patients suffering
from ischemic stroke, as early intervention appears to
lead to superior outcomes and could reduce overall
healthcare costs, particularly in long-term
rehabilitation care. In time, the market for clot-
retrieval devices could exceed USD1bn in the US.
CARDIAC ELECTROPHYSIOLOGY
The introduction of active interventions in ischemic
stroke does not de-emphasize prevention efforts.
Since clots developing in the left cardiac atrium of
atrial fibrillation patients are one of the most
common causes of ischemic strokes, there has a
considerable focus on restoring normal electrical
conductivity of the cardiac tissue. Despite some
success with multiple anti-arrhythmic medications,
many patients are poorly controlled either due to
poor compliance or low efficacy. In order to augment
medical therapy, ablation technology has been
developed which is aimed at disrupting circuits of
abnormal electrical activity in the cardiac tissue
(most notably in the left atrium), thereby restoring
normal sinus rhythm. The market leaders in this field
are JNJ and St Jude, although new technologies, most
notably from Topera Medical, could become
important treatment options for clinicians if future
trials confirm early efficacy data. The findings were
impressive, particularly in the setting of long standing
persistent atrial fibrillation. We will certainly follow
the evolution of this field closely.
HYPERTENSION
The increasing prevalence of obesity in the Western
world, coupled with an aging population, has created
a tremendous market for the treatment of metabolic
syndrome X. Medical devices combined with drug
therapy have come to play an increasing role in first
and later lines of treatment for conditions such as
hypertension and diabetes. Despite the availability of
tailored multi-drug combination treatments for
Figure 5: The Topera medical ablation technology. Source: http://www.hrsonline.org.
NEWSLETTER SECOND QUARTER 2012
Page 7
hypertension, many patients remain poorly
controlled, placing them at a risk for end-organ
damage.
Novel therapies to address drug-resistant
hypertension primarily target the sympathetic nervous
plexus surrounding the renal arteries, a treatment
known as renal denervation. The first indication of
the medical technology industry’s interest in this
space came with the announcement of Medtronic’s
acquisition of Ardian in 4Q10. The value of renal
denervation technology has been clarified by data
from Ardian’s HTN-1 and HTN-2 trials. The primary
objective of these trials was to demonstrate a
sustainable decrease in systolic and diastolic blood
pressure. Both trials succeeded in showing the
efficacy of radiofrequency renal artery ablation in a
drug-resistant patient population.
Since then, data from St Jude’s internally developed
program, Maya Medical (which was acquired by
Covidien), privately held Vessix Vascular and ReCor
Medical have become available. Boston Scientific is
also known to have a program in development, and
companies such as Kona Medical and CardioSonic are
in preclinical trials. The majority of approaches use
radiofrequency ablation, although ReCor, Kona, and
CardioSonic are based on an ultrasound platform.
Ultimately, the most successful technologies will need
to demonstrate good long-term efficacy data, offer
ease of use with a relatively short procedural time,
and show cost effectiveness. To date, balloon and
basket-based radiofrequency approaches have an
edge (Covidien, St Jude), although Medtronic’s first-
to-market position in the US cannot be disregarded. It
will also be interesting to follow the development of
ReCor, a balloon-based ultrasound system that is the
most advanced in clinical development in the non-
radiofrequency category. Using even conservative
scenarios for market penetration, these devices could
exceed annual sales of USD1bn in the US.
DIABETES MELLITUS
In diabetes mellitus, patients are offered multiple
established treatments, even as novel agents such as
GLP-1 agonists are regularly introduced. The goal of
these new therapies is to improve glycemic control,
offer a good safety profile, and be easy to use. While
orally administered drugs compete solely on the basis
of clinical performance, new developments in insulin
treatment have largely attempted to modify patient
behavior. In that respect, drug-device combination
designs have remained a key focus of research, as
every injectable drug by necessity requires
concomitant use of medical technology.
The most active area of emphasis has been the
conversion of syringe auto-injections to pump
applications. Together with the introduction of patch-
based glucose meters, the industry is now focusing on
the development of an “artificial pancreas”
treatment option, which will allow synchronization of
insulin administration with continuous glucose
measurement. The leading players here include
Insulet and Medtronic. The latter has already
introduced an insulin pump with continuous blood
Figure 6: Ardian renal denervation data. Source:
Medtronic.
COMPANY DENERVATION TECHNOLOGY US STATUS/CLINICAL STAGE
Medtronic Radiofrequency FDA Approved
St Jude Radiofrequency Clinical
Covidien Radiofrequency Clinical
Boston Scientific Undisclosed Preclinical
Vessix Vascular Radiofrequency Clinical
Kona Medical Ultrasound Preclinical
Cardiosonic Ultrasound Preclinical
Mercator MedSystems Pharmaceutical Preclinical
Table 1: Renal denervation technologies. Source:
Endovascular Today.
NEWSLETTER SECOND QUARTER 2012
Page 8
glucose monitoring, and we are expecting a similar
launch from Insulet to occur in the near future.
With the global diabetes market exceeding USD200bn,
the insulin pump market (currently estimated at less
than USD1bn) should sustain its growth momentum.
Importantly, drug delivery devices are not limited to
the administration of insulin and will certainly play an
important role in fields now dominated by hospital-
based infusion centers, such as immunology and
oncology. Medtronic and Insulet have already
highlighted the potential for the use of pump
technology in these specialties. Other new concepts
in drug formulation, such as Halozyme’s hyaluronidase
platform, which also aim to offer patients the option
of self-administered biologic drug delivery, could
prove synergistic with these pump-based approaches.
ORTHOPEDICS/DEFORMITIES
Developments in orthopedics have been largely
oriented toward joint replacement implants for
osteoarthritis and new disease-modifying agents in
inflammatory conditions such as rheumatoid arthritis.
However, there has always been an interest in
refining orthopedic care through more effective use
of medical and surgical tools. Joint replacements
have been tremendously successful in helping patients
who are poorly managed with drugs alone, yet the
idea of preventing surgery by tissue regeneration
remains the Holy Grail. Treatments with hyaluronic
acid injections have been attempted periodically,
although the long-term results have been mixed. In
addition, much attention has been placed on cell-
based therapies for the regeneration of native
cartilage. While promising, it will take time for new
developments in this area to generate meaningful
data.
More rapid progress is occurring in certain areas of
orthopedics, and there are instances in which surgery,
once the gold standard, is being replaced with
pharmaceutical solutions. An interesting example is
Auxilium Pharmaceuticals’ Xiaflex, launched in 1Q10
for the treatment of Depuytren’s contracture. Xiaflex
is a collagenase that can aid in breaking down the
cord causing the contracture, which could until now
only be resolved with surgery. Xiaflex also
demonstrated encouraging efficacy in the IMPRESS I
and IMPRESS II trials in Peyronie’s disease. The drug
is now in the pre-approval phase in the US for this
condition. Note that Xiaflex’s mechanism of action
may prove advantageous in other conditions for which
surgery remains the only option, such as frozen
shoulder syndrome and lipomas. While clearly
valuable, these new therapies often require
substantial market-priming activities, such as
effective physician education programs and the
establishment of favorable reimbursement policies
prior to launch.
New drugs and biologics are also having an impact on
other areas of orthopedics, although in the majority
of instances, the effects have not been as profound as
with Xiaflex. Active agents often allow for enhanced
bone or tissue healing after surgery. One of the most
notable examples is Bone Morphogenetic Protein 2
(BMP-2), which Medtronic markets as Infuse. Despite
its effectiveness, substantial concerns have been
raised recently over its safety in spinal surgery.
These questions underscore the need for careful
evaluation of new pharmaceutical agents in
orthopedics. Nevertheless, we expect continued
development of therapies that accelerate bone and
soft-tissue healing and permit non-surgical
management of various deformities.
Figure 7: The Omnipod insulin pump. Source: Insulet.
NEWSLETTER SECOND QUARTER 2012
Page 9
ONCOLOGY
One of the greatest advances in oncology in recent
years has been the introduction of targeted therapies.
The growing body of knowledge in cancer research
fostered the identification of multiple cancer-specific
antigens that differentiate malignant cells from their
normal environment. Targeted therapies can disrupt
cancer cells while having a minimal impact on normal
cells, thereby decreasing potential side effects and
allowing for the administration of higher drug
dosages. In doing so, these novel cancer drugs may
prove more effective in suppressing tumor growth.
Some of the most notable targeted therapies include
trastuzumab in Her2+ breast cancer and imatinib in
chronic myeloid leukemia, with a large pipeline of
products in development for the treatment of
multiple cancer types.
RADIATION ONCOLOGY
An area of increasing interest is combining radiation
therapy with chemotherapeutic agents, which permits
site selectivity based on predetermined physical
location rather than on molecular markers. Unlike
targeted therapies, the combination of chemo- and
radiation therapy is not dependent on the particular
molecular composition of the tumor. Further, the
combination can be used in a variety of tumor types,
however, on the other hand, only larger lesions are
suitable for treatment. Nevertheless the radiation
devices offered by companies such as Varian, Elekta
and Accuray, provide an increasing amount of
precision and accuracy, and result in superior
outcomes for a well-integrated chemo-radiation phase
of cancer treatment. In much the same way that
chemotherapy’s effect on healthy tissue limits the
effectiveness of the regimen, irradiation of structures
surrounding the tumor bed contributes to the overall
toxicity of the treatment. With the advent of
stereotactic, as well as image-guided radiation
treatment, such issues are becoming less limiting.
Early research on the role of radiation in oncology
focused on ways to integrate this technology in a
multi-modality treatment regimen (ie, surgery,
chemotherapy, radiation therapy) or apply it in a
palliative setting. New developments have
emphasized a growing understanding of the
synergistic value of radiation- and drug-induced
cytotoxicity, while seeking to determine whether a
more precise, higher intensity energy application can
offer a viable alternative to surgical resection. The
former involves looking at the ability of certain agents
to increase the responsiveness of tissue to radiation
treatment and designing drugs that could be
selectively activated in an irradiated area. In
addition, research suggests that there may be a
benefit to destroying a tumor mass with radiotherapy,
Figure 8: The Cyberknife system. Source: Accuray.
Figure 9: Early SBRT vs surgery data. Source: MD
Anderson.
NEWSLETTER SECOND QUARTER 2012
Page 10
rather than using surgical resection if there is a
suspicion or evidence of early metastasis. The
hypothesis relies on the innate immune reaction to
the tumor antigens released into the blood stream
following radiation-induced tissue necrosis. As a
consequence, the immune system may better respond
against micro-metastases, a phenomenon that might
not occur with surgery.
The ability to replace surgery with radiation therapy
was made possible by the development of precise and
accurate energy applications. These advances include
stereotactic body radiation therapy (SBRT) and image
guided radiation therapy (IGRT). Early research in this
area focused on the treatment of non-metastatic
prostate cancer. The major objective was to minimize
the side effects associated with more invasive surgical
treatment, as well as with less precise hyper-
fractionated radiation applications. Further
investigations focused on organs such as the lung,
liver, and pancreas, where the use of image guidance
has the potential to synchronize treatment with the
breathing cycle. While a substantial body of research
has emerged on the role of SBRT and IGRT in these
settings, major trials have only recently begun to
determine if this technology has the potential to
serve as a first-line treatment of choice in
combination with drug therapy. The most exciting
developments may soon emerge in lung cancer
patients who are surgical candidates; at present, a
number of Radiation Therapy Treatment Group
(RTOG) trials are underway, using primarily Varian
and Elekta devices, as is the STARS trial, in which
clinicians use Accuray’s Cyberknife system
exclusively. These initiatives could not only provide
substantial validation of the structural selectivity of
new radiation oncology treatments (ie, their “surgical
precision”), but also shed light on the interplay of this
modality with drug-specific effects and natural
immune mechanisms. New clinical data, coupled with
substantial investments in healthcare infrastructure in
emerging markets, should support modest growth for
the USD3.5bn global radiation-oncology market.
MOLECULAR IMAGING
Along with the introduction of new technologies to
attain optimal tissue response, we are witnessing an
increasing emphasis on the development of
personalized treatment. Identifying individual genetic
and tumor-specific genotypic and phenotypic
characteristics matters immensely when employing
new targeted therapies. Biomarker testing is an
important element of cancer management, as it
allows for dynamic treatment modification. In
addition, recent imaging advances, such as the
integration of positron emission tomography into
existing modalities (most notably computed
tomography and magnetic resonance), facilitate
functional follow-up and progress assessment. A new
field of research focuses on biomarker imaging, which
combines the ability to selectively tag a cancer cell
based on its molecular characteristics with the
visualization of the attached molecule. In doing so,
the ensuing image has the potential to precisely
delineate the tumor burden. Such modalities may
enable clinicians to assess post-treatment tumor
behavior by looking not only at its metabolic but also
highly specific molecular characteristics. They will
also allow for imaging-based tracking of molecular
changes occurring within the cancer, which, in many
cases, correlate with disease progression and
treatment responsiveness.
The use of biomarkers as such is not new in oncology;
cancer-cell expression patterns have long been
helpful in grading and staging. Physicians have used
Figure 10: Merrimack biomarker imaging. Source:
Merrimack.
NEWSLETTER SECOND QUARTER 2012
Page 11
these data to select the most appropriate treatment
regimen based on a risk/benefit analysis, as well as to
identify tumor-specific antigens, which creates an
opportunity to initiate a regimen that includes
targeted agents. Biomarkers are currently studied in
biopsy tissue samples or sequential lab testing (such
as blood or urine collection). There also is an
increasing interest in creating a molecular image of a
tumor by tagging specific biomarkers with agents that
can be detected with diagnostic devices. Such a
technology would enable a clinician to better
optimize treatment and identify risks based on the
physical location, as well as the chemical
characteristics of the lesion, and could also provide a
unique measure of treatment response. A growing
number of early- and late-stage oncology companies
are developing molecular imaging technologies as part
of their companion diagnostic offerings, all of which
are becoming essential tools in today’s era of
targeted therapies.
GENETICS AND GENOMICS
In addition to being paired with biotechnology in a
clinical setting, new medical technologies have
increasingly become key components of the drug
development process. Evolving genomic and
proteomic analysis has enabled researchers to better
understand disease mechanisms and design
appropriate drug candidates. There is no question
that the introduction of molecular diagnostic
technologies, particularly sequencing tools, has
revolutionized this area of biomedical research.
The leaders in this space, Illumina and Life
Technologies, offer advanced tools for genome
analysis. Many hope these innovations will soon
enable clinicians to personalize treatments based on a
patient’s specific genotypic and phenotypic
characteristics, particularly in the area of oncology.
However, many of the near term benefits may relate
to pre-clinical applications, with any acceleration of
the candidate drug-identification process having the
potential to lower initial investment costs for the
biopharmaceutical industry. Whether the
accumulating pool of data in genomics and proteomics
will translate into progress in clinical trials and, more
importantly, new drug approvals, remains to be seen.
We will follow the maturation of these technologies
with great interest.
CONCLUSIONS
In summary, these selected examples of the interplay
between medical technology and biotechnology
highlight an important trend that we believe is here
to stay: an increasing focus on extracting outcome
synergies from the concomitant and sequential use of
both approaches. In addition, the advent of
nanotechnology and the evolution of bioinformatics
offer the potential for considerable acceleration of
the discovery and personalization of new treatment
strategies. As these patterns emerge, we will
continue to seek out the best investment
opportunities based on products that offer clinical
value to patients and economic efficiency to
healthcare systems around the world. At the moment,
we view Covidien, Insulet, Varian and Illumina as well
positioned in their fields.
Michal Marszal, MD
Financial Analyst
Figure 11: The Illumina HiSeq2500 system. Source: Illumina.
NEWSLETTER SECOND QUARTER 2012
ABOUT SECTORAL ASSET MANAGEMENT
Sectoral Asset Management is an SEC-registered
investment advisor based in Montreal whose focus is
managing global healthcare equity portfolios. Sectoral
has one of the world’s longest track records in
managing biotech equities and is a sub-advisor of
numerous healthcare and biotech funds offered by
partners in Europe, USA, Canada, Japan, Taiwan and
Korea. Sectoral has also launched an alternative
investment fund that offers an attractive exposure to
the growing healthcare/biotech sector through both
long and short positions. The firm’s assets are USD4.0
billion as of June 30, 2012.
Investment Professionals
Jérôme Pfund, CFA - Chief Executive Officer Marc-André Marcotte, CFA – Senior Financial Analyst
Michael Sjöström, CFA - Chief Investment Officer Mina Marmor, Ph.D., CFA - Financial Analyst
Pierre Gauthier, CFA - Senior Trader Michal Marszal, MD – Financial Analyst
Bandhna Mamak, CFA - Senior Manager Paulina Niewiadomska, CFA – Portfolio Manager
Jeffery Elliott, Ph.D. – Financial Analyst Vincent Ossipow, Ph.D. - Investment Manager
Maha Katabi, Ph.D., CFA – Investment Manager Stephan Patten, CFA – Senior Portfolio Manager
Jo-Wen Lin, MBA – Financial Analyst
Scientific Advisory Network
Under the supervision of Dr. Vincent Ossipow,
Sectoral has established a proprietary network of
talented researchers and clinicians in complementary
disciplines worldwide.
The Scientific Advisory Network (SAN) is designed to
support Sectoral with scientific due diligence in its
investment process. SAN’s members include:
Amanda Adler, MD, Ph.D. Epidemiology / Diabetes Addenbrooke's Hospital, Cambridge, UK
Aurelio Balsalobre, Ph.D. Molecular Biology IRCM, Montreal, Canada
Pao-Hsien Chu, MD Cardiology Chang Gung Memorial Hospital, Taipei, Taiwan R.O.C.
Sui Huang, MD, Ph.D. Oncology Institute for Systems Biology, Seattle, WA, USA
Henry I. Miller, MS, MD Health Policy / Regulation Hoover Institution, Stanford, CA, USA
Olivier Schaad, Ph.D. Genomics University of Geneva, Geneva, Switzerland
Adam Smith, D.Phil. Drug Discovery The Nobel Foundation, Sweden
Jeffrey P. Somers, JD Law Morse, Barnes-Brown & Pendleton, Waltham, MA, USA
Brian White-Guay, MD, FRCP (C) Clinical Development / Regulatory Affairs
University of Montreal, Montreal, Canada
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The Sectoral Asset Management Inc. newsletter is published quarterly by Sectoral Asset Management (“Sectoral”), Montreal, Canada. It is provided solely for purposes of evaluating Sectoral's advisory services. This newsletter is not an offer, recommendation or solicitation to buy or sell securities or units of any Fund. Any commentary within the report is for informational purposes only and is general in nature. This document contains certain statements that may be deemed forward-looking statements. They are based on certain assumptions, analyses of historical trends, current conditions, expected future developments and other factors. Certain information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Past performance is no guarantee of future results. Investing in healthcare companies involves a high degree of risk, and prices of these companies' stocks may be very volatile. Sectoral may hold securities of issuers referred to in this report in portfolios under management. You may request performance updates by emailing Jérôme Pfund at [email protected]. SECTORAL217