longer term investments introduction to the …...market for cancer therapeutics could exceed usd...

Longer Term InvestmentsOncology

Chief Investment Office Americas, Wealth Management | 25 January 2018 4:44 pm GMTLachlan Towart, Analyst; Jerome Brimeyer, Healthcare Equity Sector Strategist Americas, [email protected]

• The aging of the global population will likely lead to a risingincidence of cancer over the next 15 years and beyond despitewell-publicized initiatives to reduce exposure to cancer risks.We expect new cancer cases to outpace population growth bya factor of 3:1. The market for oncology drugs exceeds USD100bn and should continue to grow well above GDP.

• Recent developments in understanding cancer biology and theimmune system have led to the beginning of a new era incancer treatment. The first wave of immuno-oncology drugs isnow established in the market and many new drug candidatesare being studied that could be combined with them.

• We expect 2018 to be a big year for oncology. While westress the long-term nature of drug development, we expect awave of important clinical data for the theme this year, notablysignificant late-stage trial results in lung-cancer treatment. Onthe commercial front, the first sales of personalized cancertreatments (CAR-T) will be closely watched.

According to the World Health Organization (WHO), over 14 millionnew cases of cancer occurred globally in 2012 and 8.8 millioncancer deaths in 2015. Despite great strides made in diagnosis andtreatment, cancer remains a leading cause of death.

Age is a significant risk factor for cancer; as global life expectancyrises, we expect the number of new cancer cases diagnosed tooutpace population growth. According to American Cancer Societyestimates, about 22 million new cases could be diagnosed annuallyby 2030.

We see innovative cancer therapeutics as the most investable way tobenefit from the theme. The market for drugs to treat cancer alreadyexceeds USD 100 billion and we expect it to outpace global GDPgrowth over our long-term investment horizon.

Companies with marketed drugs to treat cancer offer generallyconsistent sales trends, with earnings growth above GDP independentof the economic cycle, strong cash returns on capital and well-covered dividends. We believe exciting innovation in oncology isfound at smaller, development-stage biotech companies, whosereturns depend on successful clinical development or commercialpartnerships and have a different risk profile compared to theirestablished counterparts. In either case, we advise a diversifiedportfolio approach given the risks inherent in drug development.

LTIPopulation

growthAgeing

Urbanization

Int roduct ion to the Longer TermInvestments (LTI) series

The Longer Term Investments (LTI)series contains thematic investment ideasbased on long term structural develop-ments.

Secular trends such as population growth,ageing, and increased urbanization createa variety of longer term investmentopportunities.

Investors willing to invest over multiplebusiness cycles can benefit from potentialmispricings created by the typically shorterterm focus of stock markets.

This report has been prepared by UBS Switzerland AG and UBS Financial Services Inc. (UBS FS). Please see importantdisclaimers and disclosures at the end of the document.

Summary – cancer still outpaces populationgrowthDespite great strides made in diagnosis and treatment over the pastgeneration, cancer remains a leading cause of death globally, andwe expect its incidence to keep rising as the population ages. Thelatest American Cancer Society (ACS) projections forecast 21.6m newcases of cancer annually by 2030, compared to about 14m in 2012.This suggests new cancer cases will grow at around three times theexpected rate of population growth over the same period. Put simply,age is a significant risk factor for the development of cancer (see Fig.1), while life expectancy is rising (see Fig. 2).

Several major new developments, but much still to doIn the space of five years, the field of targeted immuno-oncology hascome of age. The first wave of this new generation of drugs, knownas checkpoint inhibitors, have established themselves as the standardof care in advanced lung cancer and melanoma, and are building salesin other cancers such as liver and kidney. Combined sales of thesedrugs are on track to exceed USD 9bn for 2017.

We expect 2018 to be a banner year for the checkpoint inhibitors,with multiple large-scale, late-stage trials expected to deliver positiveresults in the first-line lung cancer setting, which we view as thelargest single market opportunity for the class. Already, the first dat-apoint was positive, with Merck & Co announcing in January thatKeytruda's KEYNOTE-189 study met both its main endpoints. Thisis an important result, confirming the drug's efficacy in NSCLC. Butthree other drugs from Bristol-Myers Squibb, Roche and AstraZenecaare expected to complete similar trials over the course of the year. Theultimate winner will not be known until all the data is in.

Checkpoint inhibitors will continue to broaden their use as more databecomes available, including use in combination with other immuno-oncology agents. This approach harnesses the synergistic effects ofmultiple mechanisms of action, taking advantage of the relativelybenign side-effect profile of immuno-oncology drugs. This year willsee several important studies read out data providing insight intowhich combinations are most effective and against which tumors.Currently, the most advanced of these new drug classes is theIDO-inhibitors, which may have potential alongside PD-1 or PD-L1inhibitors in a range of cancers. The first Phase III trial of an IDO-inhibitor with a PD-1 inhibitor, INCYTE's ECHO-301 trial, should becompleted this year. It will be closely watched.

This year will also be important in understanding the commercialpotential of CAR-T approaches to cancer treatment. The first ofthese personalized immunotherapies were approved in late 2017. Asthey are highly complex scientifically and with practical challenges toscaling up, commercial expectations are lower than for the checkpointinhibitors.

Immuno-oncology is not the only game in town: a number of othernew cancer treatments have reached the market in the last few

Fig. 1: Cancer incidence rates by age, UKNew cancer cases per 100,000 population, selectedage groups

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Fig. 2: Life expectancy rising globallyLife expectancy at birth, years

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Source: UN, UBS, as of July 2015

Longer Term Investments

Chief Investment Office Americas, Wealth Management 25 January 2018 2

years. Drug classes such as CDK4/6 inhibitors in breast cancer, PARPinhibitors in ovarian cancer and a slew of next-generation tyrosinekinase inhibitors have improved treatment prognosis across a rangeof cancer types. While none of these new treatments are a "cure,"they represent a material improvement in ways of lengthening andbettering quality of life for many patients. Indeed, the complexity ofcancer biology means it is highly unlikely that a single "magic bullet"will be found to cure the disease; rather, several approaches will beneeded and potentially will be used together. The good news is thatearly stage research continues to open new avenues of investigation.

Looking at the pipeline, the large number of oncology drugs in clinicaltrials is exciting scientifically, but from a commercial perspective wesee a growing risk of crowding in the market. For example, we countat least thirty PD-1 and PD-L1 drugs in the clinic, of which nearlyhalf are in Phase II or III trials. Clearly, not all of these drugs will beapproved, nor can they all be blockbusters, highlighting the need fordiversification when investing in the Oncology theme.

Another important development is the growth of cancer research inChina. Increasingly, cancer is no longer just a problem in Westerncountries; nearly 60% of new cancer cases in 2012 occurred inemerging markets, according to the WHO. Cancer is now the leadingcause of death in China, and the country accounts for 22% of newcancer cases globally. Development of innovative cancer treatmentsin China is accelerating, and we are aware of a number of inno-vative Chinese biotech companies with immuno-oncology drugs inlate-stage development internationally (see Table 1 in the Appendix),some of which are listed on Western stock exchanges. In the longerterm, we see an increasing amount of new drug development beingcarried out in, and funded by, China.

Investment conclusionWe still view therapeutics as the most investable cancer-related oppor-tunity; ongoing developments in immuno-oncology are indicative ofthe range of progress being made and support our belief that themarket for cancer therapeutics could exceed USD 150bn by 2020,up from around USD 100bn in 2015. In the longer term, we see themarket growing in the mid- to high-single digits as a wider range ofcancer types becomes treatable and patients survive for longer. Whileit may be too early to pick winners in some therapeutic areas, ourtheme should deliver above-GDP earnings growth over the mediumto long term. We recommend a diversified portfolio of pharmaceuticaland biotechnology companies with exposure to our theme. The long-term nature of drug development also provides an opportunity forlong-term investors to capture an illiquidity premium through privatemarket investments in the area, including impact investment oppor-tunities.



RisksWe recommend a diversified exposure to minimize stock-specific risks.Major risks to investing in the oncology theme include:

• Clinical failure: A new drug can fail at any point during clinicaldevelopment, encounter regulatory issues or fail in post-approvalcommerce. This risk can be mitigated, but not eliminated, byfocusing on drugs with demonstrated proof of concept. Wetherefore concentrate our theme on drugs in Phase II devel-opment or later.

• Drug pricing: Recent years have seen an increased investor andmedia focus on US drug prices. The US remains the only majorcountry where drug prices are set by the market, but the legaland regulatory process surrounding government drug price nego-tiation is complicated, which we believe is unlikely to change inthe short to medium term. This means manufacturers will remainfree to charge the prices that the market will bear. Rising drugbills will undoubtedly lead to greater pressure from insurers andother payers, but truly differentiated drugs are likely to go oncommanding a premium, in our view. However, over the longterm, we cannot rule out changes to pricing dynamics.

• Regulatory environment: A key support of the recovery in R&Dproductivity seen by the pharma industry in the past five years hasbeen a more supportive and pro-industry regulatory environment,particularly that of the US Food & Drug Administration (FDA).The FDA was seen as overly risk averse and reluctant to approveinnovative new drugs, but has since introduced new approvalpathways and financial incentives for innovation. In the event ofan increase in reported adverse events perceived to be linked tothese changes, the FDA could come under pressure to return to itsearlier risk-averse days, particularly if its leadership or the politicalbackdrop is l ess pro-industry in the future.

• Market risks: Biopharmaceutical stocks are sensitive to changesin risk attitude, particularly the availability of finance for devel-opment-stage companies, while the broader healthcare sector'sperformance has historically been negatively correlated to bondyields. However, over the long-term horizon of our theme, weexpect fundamentals to dominate.



Oncology basicsCancer is a leading cause of death and generates among the highestcosts to healthcare systems around the globe. According to the WHO,over 14 million new cases of cancer (excluding non-melanoma skincancers) occurred globally in 2012, and 8.8 million cancer deaths in2015. The WHO further estimated the annual global financial costof cancer at USD 1.16 trillion in 2010, with the cost and occurrenceexpected to rise steadily given the ever aging population worldwide.

In its simplest terms, cancer is uncontrolled cell growth. It startswhen cells, for genetic, environmental (e.g. sun exposure), life-style(smoking, diet) or even unknown factors, become abnormal and growout of control. Some cancers, like leukemias and lymphomas, affectthe blood stream and blood-forming organs, while other cancersinvade normal tissues and can spread throughout the body.

The most common types of cancer in men are lung, prostate and col-orectal cancer, and in women breast, colorectal and lung (see Fig. 3),although less severe forms of skin cancer would dominate if also takeninto account. These cancers, along with blood-borne cancers likeleukemia and lymphoma, are among the largest therapeutic marketsfor pharmaceutical and biotechnology companies today.

There are over 100 known forms of cancer, each with itsown biological and life-altering characteristics. Treatment oftenrequires multiple rounds of various combination therapies – surgery,chemotherapy, immunotherapy, targeted drug therapy, etc. – tomodify disease progression, which often means increasing lifeexpectancy by a matter of months.

Given the complexity of the disease, it is unlikely that we will everfind a "magic bullet" that cures cancer. However, scientific progressin both diagnosis and treatment has led to a better outlook forcancer patients over the past few decades. According to the AmericanCancer Society, the five-year survival rate for all cancers diagnosedbetween 2007 and 2013 was 67%, up from 49% in 1975 to 1977.While there are some notable success stories for some cancers, suchas prostate and breast cancer, survival rates for some hard-to-treatcancers remain low. The five-year relative survival rate for lung cancerwas 18% for patients diagnosed between 2007 and 2013 com-pared to 12% for patients diagnosed between 1975 and 1977, whilethe pancreatic cancer five-year survival rate was just 8% versus 3%before. Clearly, the need for new and better treatments for suchcancer types is as great as ever.

Fig. 3: Cancer in the US – incidence, prevalenceand five-year survival ratesA) Incidence: new cancer cases in 2017

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Note: incidence - number of new cases estimated in2017; Prevalence - cumulative number of patients alivewith disease based on 2014 data; Survival rates based on2007-13Source: National Cancer Institute, SEER database, UBS, asof April 2017



The evolution of cancer treatmentCancer treatment evolved relatively slowly until the last two decades(see Fig. 4), with most advances in surgery, radiotherapy andchemotherapy offering only incremental improvements in survivalcompared with previous treatments. More recently, a better under-standing of cancer cell biology and the immune system has led to thedevelopment of immuno-oncology, an approach that uses the body'simmune system to fight cancer. Immuno-oncology treatment offersthe hope of more durable responses to treatment than conventionaltherapy (see Fig. 5) but also has the benefit of significantly reducingside effects. The newest generation of immuno-oncology drugs toreach the market are the so-called checkpoint inhibitors. The benefitsof these drugs include:

• Improved patient survival rates. For example, melanoma pro-gression-free survival has improved from typically just a fewweeks with traditional chemotherapy, to 2.9 months with Yervoy,6.9 months with Opdivo, and 11.5 months using Opdivo andYervoy in combination.

• Improved safety profile compared to traditionalchemotherapy.

• Improved quality of life during treatment.

Six checkpoint inhibitors have now been approved, as well as twoCAR-T treatments. The checkpoint inhibitors have rapidly establishedthemselves as the standard of care in advanced lung cancer andmelanoma, with sales on track to exceed USD 9bn for 2017. The rela-tively benign safety profile of PD-1 and PD-L1 inhibitors suggests theycould be used in combination with existing chemotherapies or otherimmuno-oncology drugs, which act to boost the immune system orsuppress a tumor's ability to evade attack, potentially making themthe backbone of treatment for many cancer types. This year will seethe release of critical late-stage data providing insight into whichcombinations are most effective and against which tumors. This datawill be key to determining the scientific and commercial potential forthese drugs. Work is also taking place to improve diagnostic proce-dures to identify the patients most likely to benefit from each drugand combination.

Checkpoint inhibitors do not work for all patients, but have beenshown to produce deep and long-lasting responses to treatment insome cases. Beyond checkpoint inhibitors, research continues on awide range of other approaches that could dramatically change theprognosis in certain cancer types; IDO inhibitors look like the next classto reach the market. Personalized immuno-oncology using modifiedT-cells (known as CAR-Ts) has now reached the market.

We provide an updated discussion of some of these potential treat-ments in the Appendix below.

Fig. 4: The evolution of cancer treatmentSeveral advances beyond traditional cancer treatment

Personalised immunotherapy (e.g., CAR-Ts)

SurgeryAncientt imes

Targeted therapies

Next?

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Source: UBS

Fig. 5: The hope for immuno-oncologyLong, durable responses could transform survival rates

Note: For illustration only, not based on actual dataSource: Credit Suisse, UBS



Link to Sustainable InvestingTo identify whether a Longer Term Investment (LTI) theme qualifies asa Sustainable Investment (SI) theme. LTIs are assessed according towhether they match one or more of the sustainability topics within theenvironmental, social and governance (ESG) categories (see Fig. 6). Ingeneral, these themes must contribute to environmental sustainability(e.g. a low-carbon economy), resource-efficiency (e.g. energy, water),sustainable society (e.g. health, education, poverty reduction, equalityand social inclusion, etc.) or sustainable corporate governance.

Oncology and the Sustainable DevelopmentGoals (SDGs)The rising incidence of cancer globally is alarming. However, its pacein developing countries is of particular concern. According to theEuropean Society of Medical Oncology, more than 66% of newlydiagnosed cancer cases will occur in those regions with the leastresources to tackle them. Cancer and other non-communicable dis-eases constitute a major health and development challenge, withcross-cutting implications for the United Nations' Sustainable Devel-opment Goals (SDGs). Impact investors can play a critical role inexpanding both the quality of, and access to, oncology treatments. Inparticular, as long-term investors, impact investors can help addresstwo key financing obstacles that are currently holding back progressin this field:

• The first hurdle concerns affordability, particularly in emergingmarkets where average incomes are lower. With public financingin emerging markets coming under increasing pressure, impactinvestors have a chance to step in and offer separate for-profitsolutions to augment similar activity by listed companies.

• The second obstacle relates to the process of developing treat-ments. Studies of the European Society for Medical Oncologyhave shown that the quarterly earnings cycle, real-time pricingand constant scrutiny of corporate performance by shareholdersencourage listed pharmaceutical companies to focus on projectswith clearer and more immediate payoffs at the expense of morespeculative but potentially transformative and lucrative research2.As a result, funding for the riskiest segment of the drug-devel-opment process – the translational phase between basic researchand human clinical trials – is severely limited. Impact investors canaddress this significant funding shortfall – known in the industryas the "valley of death" – by plugging intermediate gaps in thedrug-development process.

Private market investors typically must commit capital for many yearsdue to the nature of drug development, but these long-lockup invest-ments can earn venture capital-type returns if a number of the fundeddrugs are successfully brought to market. Investors with this socialimpact objective can further commit to addressing the challengesin oncology by reinvesting a portion of any investment profits backinto basic research and efforts to improve access to treatment inemerging markets. Impact investing can be a particularly attractive

Fig. 6: Overview of longer-term investmenttopic clusters

* For simplicity, all topic clusters include several subcate-gories not included in the chart. For example: sustainablewater includes water utilities, treatment, desalination,infrastructure & technology, water efficiency and ballast-water treatment. Within each subcategory are furtherspecifications; e.g. water treatment includes filtration,purification and waste treatment. In total, we have morethan 100 categories (potential SI investment themes) inour thematic database.Source: UBS

Fig. 7: MSCI ESG research corporate coverageRating distribution in %, 5,915 companies

AAA3%

AA10%

A17%

BBB24%

BB23%

B19%

CCC2%

Note: AAA = best possible ESG rating; CCC = worstSource: MSCI ESG Research, UBS, as of 19 December 2017



solution for ultra high net worth investors, who may have more riskcapital than average and often less short-term need for their capital.As a result, they can afford to lock up more funds in longer-terminvestment opportunities. Impact investing provides such investorswith the opportunity to earn potentially compelling long-term returnswhile more closely aligning their portfolios with their personal valuesand social objectives.

Andrew Lee, Head Impact Investing and Private MarketsJames Gifford, Senior Impact Investing StrategistNicole Neghaiwi, Impact Investing Analyst

Appendix: Cancer treatment – past, present andfutureTwentieth century cancer treatmentThe first line of cancer treatment, from ancient times to the presentday, has been the surgical removal of malignant tumors (see Fig.4 above). The result, however, can be temporary; the tumor oftengrows back. For this reason, there is a pervasive belief that cancercannot be cured. There are, however, many more cancer treatmentoptions beyond surgery. In the late 19th century, radiation (x-rays)was discovered and subsequently used in cancer treatment. Also inthe 19th century, the effect of specific hormones on certain cancerswas discovered, establishing the groundwork for the modern use ofhormone therapy that took off in the 20th century. During WorldWar II, the impact of particular chemicals on cancer was observed,which translated into the development of the first chemotherapies.These treatment options – surgery, radiation, hormone therapy andchemotherapy – remain prevalent today, but much more effectivetreatments, with better survival outcomes and improved quality oflife, have come to the fore.

During the second half of the 20th century, the understanding ofthe immune system and the biology of cancer advanced signifi-cantly and led to what we now call immunotherapy. Initially, thisincluded the biotechnological development of substances like inter-ferons, interleukins and other cytokines aimed at boosting a patient'simmune system. Around the turn of the millennium, this approachwas followed by the development of techniques that identified spe-cific tumor targets and aimed antibodies at these tumors, thereby hin-dering tumor growth. These so-called recombinant monoclonal anti-bodies, and tyrosine kinase inhibitors (TKIs, or small molecules tar-geting specific cancer cells) are now used routinely in cancer therapy,often in combination with older cancer therapies, and have led tobetter survival rates and an improved quality of life.

The emergence of immuno-oncologyThe common thread linking most recent developments in cancer careis a better understanding of the immune system. It has actually beenknown for a century or more that the immune system could play a rolein cancer treatment, but the scientific developments allowing us totake advantage of this knowledge are much more recent. The inter-ferons described above, developed in the 1980s and 1990s, were an



early form of immunotherapy. Later, recombinant monoclonal anti-bodies were developed to target tumors directly, such as Roche'santi-B cell therapy Rituxan for non-Hodgkin's lymphoma. The mostrecent developments involve the T-cell part of the immune system, andappear to be a step-change in treatment for some patients. In par-ticular, the so-called checkpoint inhibitors, drugs that block a cancercell's ability to defend itself from the immune system, have showndurable responses and improved survival rates in several subsets ofpatients across an ever-expanding range of tumor types, includingmelanoma, lung, renal, bladder and head & neck cancers. Com-pared to traditional chemotherapy, the side-effect profile of check-point inhibitors is relatively benign, offering an improved quality oflife for patients.

The first therapeutic checkpoint inhibitor was Bristol-Myers Squibb'sCTLA-4 inhibitor Yervoy, approved for treating melanoma in 2011. In2014, two checkpoint inhibitors targeting PD-1, Opdivo from Bristol-Myers Squibb and Keytruda from Merck & Co, were approved totreat late-stage melanoma, and subsequently extended to treatmentof earlier-stage disease. As more data has become available, theapprovals for both drugs have broadened substantially: as of early2018, both Opdivo and Keytruda are approved for late-stage non-small cell lung cancer (NSCLC), head and neck (H&N) cancer, bladdercancer, Hodgkin's lymphoma and a type of colon cancer, whileOpdivo is also approved for refractory kidney and liver cancers, andKeytruda for gastric cancer. Importantly, in October 2016 and May2017, respectively, Keytruda's label was extended to include first-line treatment of NSCLC as a single agent and in combination withchemotherapy. Keytruda remains the only checkpoint inhibitor withthis important indication, but this is likely to change given the sig-nificant wave of NSCLC data expected during 2018. In the relatedclass of PD-L1 inhibitors, Roche's Tecentriq has been approved to treatbladder cancer and advanced NSCLC, and Bavencio from Pfizer andMerck KGaA for bladder cancer and a rare skin cancer known asMerkel cell carcinoma. Finally, AstraZeneca's Imfinzi was approved inMay 2017 to treat bladder cancer.

These drugs are rapidly establishing themselves as the standard ofcare, with combined sales already annualizing at over USD 9bn for2017. Beyond the approved products, around thirty more PD-1 andPD-L1 inhibitors are currently in clinical trials. Over 30 different cancertypes are being targeted: beyond melanoma and lung cancer, check-point inhibitors have so far shown evidence of benefit in bladder,ovarian, gastric, head and neck, and liver cancer, among others.Table 1 provides an overview of key immuno-oncology drugs in devel-opment, including checkpoint inhibitors.

While the checkpoint inhibitors have demonstrated impressiveefficacy in some patients, a key feature of these drugs is their rel-atively benign side-effect profile. This allows them to be combinedwith almost any other type of treatment: chemotherapy, TKIs, cancervaccines, and in particular other immuno-oncology drugs. Multiplemechanisms of action are used together routinely in oncology, due to



the potential for synergistic effects. A similar benefit could be seenwith the use of multiple immuno-oncology drugs: it is hypothesizedthat other treatments could stimulate the tumor to be in a moreimmunogenic state, increasing the tumor's sensitivity to treatmentwith checkpoint inhibitors. For example, Opdivo is approved for usealong with Yervoy in melanoma treatment, and the past two yearshave seen an explosion of trials studying various combinations ofimmuno-oncology drugs, particularly of PD-1/PD-L1 inhibitors withnewer agents such as IDO inhibitors. Beyond these combinations, awide range of mechanisms of action are being studied (see Table 1)but are still some years from the market.



Table 1: Current and future immuno-oncology pipeline

Mechanism Drug Company Status Cancer type(s) where disclosed

Current wave

CTLA-4 Approved Melanoma, NSCLC

CTLA-4 Phase III NSCLC, H&N, others

CTLA-4

Yervoy (ipilimumab)

tremelimumab

AGEN-1884

Bristol-Myers Squibb

AstraZeneca

Agenus Phase II

PD-1

PD-1

PD-1

Approved Melanoma, NSCLC, kidney, others

Approved Melanoma, NSCLC, H&N, others

Phase III NSCLC, others

PD-1

PD-1

PD-1

PD-1

Phase III

Phase II

Phase II

Phase II

PD-1

PD-1

PD-1

PD-L1

PD-L1

PD-L1

PD-L1

PD-L1

Opdivo (nivolumab)

Keytruda (pembrolizumab)

cemiplimab

PDR001

MEDI-0680

tislelizumab (BGB-A317)

camrelizumab (SHR1210)

pidilizumab (MDV9300)

AGEN2034

JNJ-63723283

Tecentriq (atezolizumab)

Imfinzi (durvalumab)

Bavencio (avelumab)

BMS-936559

CX-072


Merck & Co

Regeneron / Sanofi

Novartis

AstraZeneca

BeiGene / Celgene

Incyte / Jiangsu Hengrui

Pfizer

Agenus

Johnson & Johnson

Roche

AstraZeneca

Pfizer / Merck KGaA


Cytomx Therapeutics

Phase II Hematological cancers

Phase II

Phase I/II Multiple myeloma

Approved NSCLC, bladder, others

Approved NSCLC, melanoma, others

Approved Bladder, ovarian, others

Phase II

Phase I/II

Potential next wave - key mechanisms of action

epacadostat Incyte * Phase III

indoximod Phase III

BMS-986205 Phase III

NSCLC, melanoma, others

Pancreatic, melanoma, others

Bladder, cervical

IDO

IDO

IDO

IDO IO101

NewLink Genetics


IO Biotech Phase II

LAG3 Phase II

LAG3 Phase II

Melanoma

Breast, melanoma

LAG3

relatlimab

eftilagimod

IMP701 (LAG525)


Immutep (Prima BioMed)

Novartis / Immutep Phase II

CSF1R Phase III

CSF1R Phase II

Breast, ovarian, others

NSCLC, melanoma, others

CSF1R Phase II

CSF1R Phase II

CSF1R Phase II

CSF1R

pexidartinib

cabiralizumab (FPA008)

ARRY-382

BLZ945

MCS110

emactuzumab

Daiichi Sankyo (Plexxikon)

Five Prime / Bristol-Myers Squibb

Array BioPharma

Novartis

Novartis

Roche Phase I/II

KIR lirilumab Bristol-Myers Squibb / Innate Pharma Phase II Leukemia, others

KIR IPH4102 Innate Pharma Phase I/II Lymphoma

OX40 BMS-986178 Phase II

OX40 INCAGN1949 Phase II

OX40 GSK-3174998 Phase II

OX40 MEDI-6469


Incyte / Agenus

GlaxoSmithKline

AstraZeneca / AgonOx Phase II

GITR BMS-986156 Phase II

GITR INCAGN1876


Incyte / Agenus Phase II

Note: Not exhaustive, only Phase II and later candidates shown. * Collaborations with Merck & Co, Bristol-Myers Squibb and AstraZenecaSource: UBS, as of January 2018



Lung cancer is the biggest single market for immuno-oncologyThis year will likely see the release of critical late-stage data in NSCLCfor all four leading PD-1 and PD-L1 inhibitors. Lung cancer is animportant market due to its large potential size (one of the highest-incidence cancers globally), poor prognosis (five-year survival rates arestill below 20% in the US), and the lack of other treatment options.We view it as the single largest opportunity available to checkpointinhibitors, and estimate sales in first-line NSCLC could account forUSD 15bn of our total USD 35bn peak sales forecast for these drugs.So far, only Keytruda has been approved for use in first-line NSCLC,and only for the estimated 25% of patients with PD-L1 expressionlevels above 50%. The data to be released in the next 12-18-months istherefore critical in determining how this large market will be dividedup amongst the leading drugs, as well as hugely influencing the totalsales of each of these agents.

The approval of Merck's Keytruda for first-line NSCLC as both asingle agent and combined with chemotherapy, as well as the recentheadline result of the KEYNOTE-189 trial, shows that immuno-oncology will play a major role in transforming the treatment of lungcancer. However, it remains unclear exactly how big that role will be,and how the market will split between the leading drugs. BeyondKeytruda's success so far, data has been mixed. Two high-profilestudies have failed: Opdivo as a single agent did not show any benefitover chemotherapy in CHECKMATE-026, and last year Imfinzi failed todemonstrate a progression-free survival benefit (either alone or com-bined with tremelimumab) in the MYSTIC trial. The reasons for thefailure of both trials are still unclear. MYSTIC continues in the hope ofshowing a benefit on the harder endpoint of overall survival, but willneed to demonstrate strong data in order to be competitive. Recentdata is more encouraging: Roche's Tecentriq, in combination withAvastin and chemotherapy, has demonstrated an improvement in pro-gression-free survival (PFS) in first-line NSCLC in the IMpower-150 trialalthough no overall survival data is yet available. Based on earlier-stage data, and the larger IMpower-150 and KEYNOTE-189 results,we believe sufficient evidence exists to show that most of the ongoingIO/chemotherapy combination trials will deliver positive outcomes,although we are less certain of IO/IO combinations.

The two major debates that may be solved by the ongoing trials relateto the best approach to combination therapy, and the segmentationof patients. Regarding combinations, there are two main approaches,each with its pros and cons:

• IO/chemotherapy (use of an anti PD-1 or PD-L1 withchemotherapy). Merck & Co and Roche are taking this approach.

• IO/IO therapy (combination of two immuno-oncology agentssuch as anti PD-1 with CTLA-4 or anti PD-L1 with CTLA-4). Thisis the approach generally favored by Bristol-Myers Squibb andAstraZeneca.

A key advantage of IO therapy is its relatively clean side-effect profile.For this reason, many oncologists would like to move away from

Fig. 8: Lung cancer is already driving IO salesgrowthEstimated quarterly US sales of PD-1 and PD-L1 drugsby indication, USD millions

0

200

400

600

800

1,000

1,200

1,400

1,600

Q1'

15

Q2'

15

Q3'

15

Q4'

15

Q1'

16

Q2'

16

Q3'

16

Q4'

16

Q1'

17

Q2'

17

Q3'

17

1L lung 2L lung Melanoma RCC Bladder H&N Other

Source: Company data, UBS estimates, as of January 2018Note: RCC = kidney cancer; H&N = head & neck



chemotherapy entirely, suggesting an IO/IO combo would be popularwith clinicians and patients. However, this would only hold if efficacydata is at least as good as IO/chemo combinations. As chemotherapytends to affect cancer cells more quickly than IO treatments, IO/chemocombos may be expected to show better efficacy on progression-freesurvival metrics. But as the data matures, the more important overallsurvival data will emerge as the most important measure of efficacy,and here IO/IO combinations may have an advantage, as IO tends tohave a longer duration of activity. Until all the data comes in, though,there is no definitive answer to this question.

The failure of Opdivo's CHECKMATE-026 study illustrates the otherkey debate: which patients are most likely to benefit, and canthey be identified in advance? Bristol-Myers tested patients withfar lower levels of PD-L1 expression (PD-L1 > 1% or > 5%), inCHECKMATE-026, while Merck's successful KEYNOTE-024 trial setthe cut-off at a much higher level of PD-L1 expressors (PD-L1 > 50%).Further studies will be required to determine how these results willinfluence checkpoint inhibitor development. A final emerging debateis whether PD-1 and PD-L1 drugs have broadly the same efficacy, or ifone group will eventually be shown to be superior. We think there isnot enough data to determine the answer to this question yet either.

We expect the following key trials for each of the leading drugs inNSCLC over the next 12-18 months:

• Keytruda. Merck's Keytruda is the only checkpoint inhibitorwhich has so far been approved for use in first-line NSCLCtreatment. The FDA approved the drug in combination withchemotherapy based on the KEYNOTE-21G trial, which showedan impressive improvement in progression-free survival (from8.9 months with chemotherapy alone to 19.0 months with theaddition of Keytruda). However, there was no meaningful dif-ference in overall survival between the two arms. In January 2018,Merck announced that the confirmatory trial KEYNOTE-189 hadmet both its primary endpoints, showing a benefit on overallsurvival as well as progression-free survival for the combinationof Keytruda and chemotherapy. This early result surprised themarket (last year, Merck had delayed the readout, potentially until2019) and repositions Merck as the closest to gaining FDA fullapproval of a PD-(L)1 combination for first-line NSCLC. Indeed,as the drug has already been approved based on the smallerKEYNOTE-21G study, as soon as detailed data is available its salescould benefit. But this data will not be available until later in theyear, and in the meantime we expect most of Merck's competitorsto also announce positive results.

• Opdivo. Bristol-Myers Squibb's chance of being the first tomarket in first-line NSCLC took a setback with the high-profilefailure of Opdivo's CHECKMATE-026 study in August 2016(Opdivo as a single agent). But since AstraZeneca's MYSTIC failedto deliver an early positive with progression-free survival datalast year, Bristol could now still have the first approved IO/IOcombination. The ongoing CHECKMATE-227 study is expected



to deliver its first data soon, suggesting the Opdivo + Yervoycombination could be approved later this year if positive. Datafrom a small study (CHECKMATE-012) reported in 2016 isencouraging, showing higher efficacy than Opdivo used alone.CHECKMATE-227 also includes a chemotherapy arm, givingBristol a hedge in case this approach turns out to be better, ahypothesis supported by the early success of KEYNOTE-189.

• Tecentriq. Roche announced first headline data (pro-gression-free survival) from the IMpower-150 trial in December2017. This trial added Tecentriq to chemotherapy and Roche'santi-angiogenic drug Avastin. However, not all the trial's armshave yet been reported and we think the final OS picture isimportant in understanding the implications for Tecentriq's com-mercial positioning. Two other trials studying Tecentriq withdifferent types of chemotherapy, known as IMpower-130 andIMpower-132, will also finish this year, helping to complete thepicture. Given this timeline, Roche could have Tecentriq approvedfor NSCLC around the end of 2018.

• Imfinzi. In July 2017, AstraZeneca announced that in its IO/IOstudy MYSTIC Imfinzi failed to demonstrate a progression-freesurvival benefit, either alo ne or combined with its CTLA-4inhibitor tremelimumab. The trial is continuing and shouldproduce overall survival data, a more robust endpoint, during2018. However, we believe the market is skeptical about thelikely strength of this data. Therefore, expectations for Imfinziin first-line lung cancer are now low. But AstraZeneca has othertrials underway for Imfinzi in various other indications, includingother types of lung cancer. Notably, the PACIFIC trial showedthat Imfinzi improves disease-free survival in post-surgical NSCLCpatients, giving Imfinzi a clear lead in this setting that could beworth USD 2bn or more, we estimate.

This year thus promises a rich vein of news on these leading drugs,as well as other less high-profile datapoints that will allow clini-cians, and investors, to better compare their efficacy and safety. Atpresent, Merck appears to be closest to full FDA approval in first-line NSCLC following the KEYNOTE-189 result, But Bristol-Myers andRoche could be fast followers depending on the timing of theirstudies. AstraZeneca is marginally behind, but has an element of"wildcard" status. It is too soon to call a winner as the full set ofoverall survival data is not available, in our view.

In due course, data from other IO/IO combinations, such as PD-(L)1swith IDO inhibitors (see below) may also impact the way that lungcancer is treated. What is clear is that treatment options in NSCLC willevolve rapidly in the next two years, creating a large potential marketfor the companies with the best-positioned drugs, in our view.



Table 2: Summary of approval status for currently-marketed PD-(L)1 inhibitorsOpdivo Keytruda Tecentriq Imfinzi Bavencio

Indication Single agent IO / IO combo Single agent Chemo combo Single agent Chemo combo Single agent IO / IO combo Single agent

Melanoma

First-line

Second-line

Lung cancer (NSCLC)

First-line PD-L1 +ve

Second-line

Bladder cancer

First-line

Second-line

Other cancers

Gastric cancer

Head and Neck cancer

Renal Cell Carcinoma

Liver

Hodgkin's Lymphoma

Colorectal

mMCC

Source: Company data, UBS, as of January 2018. Note: Checkmarks indicate approved indications; based on US approval status.

IDO inhibitors likely next to market in immuno-oncology - keydata in 2018The checkpoint inhibitors described above have demonstratedimpressive response rates (i.e. reduction of tumor size) and sur-vival benefits in some patients. However, many patients still do notrespond, leading researchers to explore new mechanisms to boostthe immune system, or to slow down the cancer's ability to evade it.Unlike traditional chemotherapy, or even antibodies directly targetingtumors, which typically have severe toxicity that limits use in combina-tions, immuno-oncology's side-effect profile is generally more benign.This allows many of these new drug candidates to be explored incombination with the checkpoint inhibitors. We expect some of thesenew drugs to emerge as the "next wave" of immuno-oncology drugs,potentially reaching the market within the next two years.

Currently, IDO inhibitors appear most likely to be the first of the"next wave" to launch. While relatively inactive as single agents,they are well-suited to combination studies, and have demonstratedgood activity in combination with PD-1s (including both Opdivo andKeytruda). Incyte's epacadostat is the most advanced drug in theclass, currently in a range of late-stage studies combined with variousPD-1 and PD-L1 inhibitors. The most important such study, knownas ECHO-301, is a Phase III trial in melanoma, using epacadostat incombination with Merck's Keytruda and is likely to read out duringmid-2018.

While Incyte is ahead in the clinic, the IDO inhibitor class is likelyto become competitive quite quickly. Despite being partnered withIncyte on epacadostat, Bristol-Myers Squibb also has its own in-houseIDO inhibitor, shortly to start Phase III trials in bladder and cervicalcancers. Based on limited clinical data available, Bristol's drug lookslike it will be competitive with epacadostat although it may reach



the market somewhat later. If the early data can be replicated inlarger studies, IDO-containing combinations could be important intreating melanoma, and potentially other cancer types, and couldeven credibly challenge PD-(L)1/CTLA-4 combinations in some set-tings.

CAR-T: personalized therapies reach the market; time now toshow commercial viabilityDespite the impressive improvement in survival seen so far withcheckpoint inhibitors, these treatments and their follow-ons are nota “cure” for cancer. One area of development that could offerimprovement over other IO approaches is the development of person-alized cellular immunotherapy including CAR-T treatment and T-cellreceptors (TCRs).

CAR-T treatment combines the cytotoxic (i.e. cell-killing) ability of T-cells (a type of white blood cell responsible for fighting infections) withthe targeted nature of monoclonal antibodies. Treatment involves athree-step process:

1. T-cells are removed from the body

2. The T-cells are engineered to recognize the relevant cancer target

3. Engineered T-cells (CAR-T's) are reintroduced to the patient wherethey multiply and attack the targeted cancer cells

The first two CAR-T therapies were approved in 2017: Novartis'sKymriah, for acute lymphoblastic leukemia (ALL), and Yescarta fromKite Pharma (now owned by Gilead), for certain types of non-Hodgkins lymphoma (NHL). These approvals have materially de-riskedthe CAR-T approach from a scientific perspective; however, it is stillearly days on the commercial side. Nevertheless, these treatmentscould potentially change the standard of care for many younger ALLand NHL patients who previously had few treatment options. Shouldvalid concerns over real-world safety and manufacturing challengesbe overcome, we estimate CAR-T and related approaches could ulti-mately be a US 10bn (or greater) market opportunity.

The headline prices of CAR-T therapies are high: Kymriah is pricedat around USD 450,000 and Yescarta at just over USD 370,000 pertreatment. But given that these are intended to be one-off, poten-tially curative, treatments, for relatively young patients who wouldotherwise have life expectancies measured in months or even weeks,we do not expect these high headline prices to limit use. The maincommercial challenges, as we see it, will revolve around managingsafety and controlling the complex manufacturing process. As eachtreatment is unique to a single patient, quality, consistency andsecurity of supply must all be managed carefully. As for safety, themain concern is a severe immune reaction known as cytokine releasesyndrome (CRS) which is life threatening. Clinical data suggests CRSis manageable, but there is little real world experience yet. For bothof these reasons, we expect CAR-T treatments to be administeredin high-level specialist hospitals, at least initially, rather than localoncology centers.



In limited populations, CAR-T treatments have shown impressiveefficacy, by far the highest response rates of any therapies to datefor these hard-to-treat blood-borne cancers. For example, Novartisannounced data from a Phase II trial of its CAR-T therapy CTL-019,showing that 55 out of 59 children (93%) with ALL had completeresponses to treatment, and 79% of patients were still alive a yearafter treatment. In DLBCL, Yescarta has shown a six-month completeresponse rate of 31% in a 77-patient trial, and Juno's JCAR-017 hasshown complete response rates over 70% in a similar population,although with much smaller numbers of patients. This data compareswith less than 10% response rates with traditional treatments.

More CAR-T treatments are in development and the range of targeteddiseases is widening (see Table 3). Juno Therapeutics and Bluebird Bio,both partnered with Celgene, are perhaps the closest to market. Also,several companies are developing related T-cell approaches that couldreduce or eliminate CAR-T's safety and manufacturing challenges.Cellectis is studying an "off-the-shelf", or universal, CAR-T (UCAR-T) that has been successfully used in very limited patient groupsalthough progress has been slow so far. Other approaches includeengineered T-cell receptors (eTCRs) and tumor-infiltrating lympho-cytes (TILs). Still, if these challenges can be overcome, the potentialfor personalized immunotherapies is great, in our view.



Table 3: Major CAR-T and T-cell therapy candidates

Mechanism Drug Company Status Cancer type(s) where disclosed

CAR-T approaches

CD-19 Kymriah (tisagenlecleucel-T) Novartis Approved ALL, DLBCL

CD-19 Yescarta (axicabtagene ciloleucel) Gilead (Kite Pharma) Approved Non-Hodgkins (DLBCL), ALL, MCL

CD-19 JCAR-017 Juno Therapeutics Phase I/II Non-Hodgkins (DLBCL)

CD-19 JCAR-014 Juno Therapeutics Phase I Non-Hodgkins (DLBCL)

CD-19 Ziopharm / Intrexon Phase I Leukemia, lymphoma

CD-19 (UCART) UCART19 Cellectis Phase I B-cell malignancies

CD-123 (UCART) UCART123 Cellectis Phase I B-cell malignancies

CD-22 JCAR-018 Juno Therapeutics Phase I ALL, non-Hodgkins lymphoma

CD-33 Ziopharm / Intrexon Phase I Acute myeloid leukemia (AML)

DLL3 AMG 119 Amgen Phase I Small cell lung cancer (SCLC)

BCMA bb2121 Bluebird Phase I/II Multiple myeloma

BCMA KITE-585 Gilead (Kite Pharma) Phase I Multiple myeloma

BCMA CJCARH125 Juno Therapeutics Phase I Multiple myeloma

MUC16 JCAR-020 Juno Therapeutics Phase I Ovarian

NKR-2 CYAD-01 Celyad Phase I AML, multiple myeloma

ROR1 JCAR-024 Juno Therapeutics Phase I Breast, NSCLC

Other TCR approaches

AFP TCR Adaptimmune Phase I/II Liver

Anti-EBV tabelecleucel (ATA129) Atara Biotherapeutics Phase II

MAGE A3 / A6 KITE-718 Gilead (Kite Pharma) Phase I Solid tumors

MAGE A4 TCR Adaptimmune Phase I/II Solid tumors

MAGE A10 TCR Adaptimmune Phase I/II NSCLC, solid tumors

NY-ESO TCR Adaptimmune Phase I/II Myeloma, others

PCSA BPX-601 Bellicum Phase I/II Pancreatic

PRAME TCR BPX-701 Bellicum Phase I Melanoma

TIL Iovance Phase II Melanoma, others

WT-1 JTCR016 Juno Therapeutics Phase I / II NSCLC

WT-1 JTCR016 Juno Therapeutics Phase I / II Acute myeloid leukemia (AML)

Source: UBS, as of January 2018. Note: Not exhaustive, only candidates in clinical development are included.



Appendix

Terms and AbbreviationsTerm / Abbreviation Description / Definition Term / Abbreviation Description / DefinitionA actual i.e. 2010A COM Common sharesE expected i.e. 2011E GDP Gross domestic productH half year Shares o/s Shares outstandingUP Underperform: The stock is expected to

underperform the sector benchmarkCIO UBS WM Chief Investment Office

x multiple / multiplicator

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