longer term investments

Longer Term InvestmentsOncology

Chief Investment Office WM | 25 April 2016 Lachlan Towart, analyst, [email protected]

• The aging of the global population will lead to rising incidence ofcancer over the next 15 years and beyond, despite well-publicizedinitiatives to reduce exposure to cancer risks. We expect new cancercases to outpace population growth by a factor of 3:1. The marketfor oncology drugs is currently USD 100bn and should continue togrow above GDP.

• Recent developments in understanding cancer biology and theimmune system have led to the beginning of a new era in cancertreatment, with the first wave of immuno-oncology drugs nowestablished in the market. Multiple new drug candidates are beingstudied that could be combined with these drugs.

• The theme can be accessed via investment in large pharmacompanies with relatively predictable volume trends, high returnson capital and secure, growing dividends, or by earlier-stageinvestment in innovative biotechnology companies. The latterapproach has a different risk profile and can also be suitable forprivate market investments.

• In either approach we recommend a diversified portfolio and a long-term investment horizon.

Our viewAccording to the World Health Organization (WHO), over 14 million newcases of cancer and over eight million cancer deaths occurred globallyin 2012. Despite great strides made in diagnosis and treatment, cancerremains a leading cause of death.

Age is a significant risk factor for cancer; as global life expectancy rises, weexpect the number of new cancer cases diagnosed to outpace populationgrowth. According to American Cancer Society estimates there could beabout 22 million new cases diagnosed annually by 2030.

We see innovative cancer therapeutics as the most investable way to benefitfrom the theme. The cost of drugs to treat cancer is already USD 100billion and we expect this market to outgrow global GDP over our long-term investment horizon. Companies with marketed drugs to treat canceroffer generally consistent sales trends, with earnings growth above GDPindependent of the economic cycle. Strong cash returns on capital and well-covered dividends are also characteristic of pharma companies.

Some exciting innovation in oncology is found at smaller, development-stage biotech companies, whose returns depend on successful clinicaldevelopment or commercial partnerships and represent a different riskprofile to their established counterparts. In either case we advise adiversified portfolio approach given the risks inherent in drug development.

Source: UBS database

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

This is an excerpt from a UBS CIO WM publication. For

access to the complete research report, please visit the

UBS Quotes online portal or contact your client advisor

for assistance.

Oncology update – cancer still outpacing population growthDespite great strides made in diagnosis and treatment over the past gener-ation, cancer remains a leading cause of death globally, and we expect itsincidence to keep rising as the population ages. The latest American CancerSociety (ACS) projections forecast 21.6m new cases of cancer annually by2030, compared to about 14m in 2012. While this actually represents aslight decrease in the forecast incidence (down 3% from the ACSs 2013forecast of 22.2m), it still suggests new cancer cases growing at aroundthree times the expected rate of population growth over the same period.Put simply, age is a significant risk factor for the development of cancer(Fig. 1), and life expectancy is rising (Fig. 2).

Recent progress and long-term goalsThe emergence of targeted immuno-oncology has led to the beginning of anew era in cancer treatment, and the first wave of immuno-oncology drugs,known as checkpoint inhibitors, have now firmly established themselves asstandard of care in advanced lung cancer and melanoma. But this may bejust the beginning, with the real opportunity lying in combining these drugswith the next wave of immuno-oncology therapies that are still in earlierstages of clinical development. This harnesses the synergistic effects of mul-tiple mechanisms of action, and takes advantage of checkpoint inhibitors'relatively benign side effect profile. There are currently drugs against at least25 new targets being studied in clinical trials across a variety of tumor types;data from the first of these trials could become available during 2016-17,providing insight into which combinations have the most potential. Check-point inhibitors are also being studied in a wide range of settings with othercancer treatment modalities, including personalized immunotherapy (CAR-T) and cancer vaccines. However, these approaches are at a much earlierstage and not all of them will work.

Looking to the longer-term, early-stage research continues to open newavenues of investigation. For example, a much-publicized recent study*indicated that it may be possible to make cancer cells more visible to theimmune system, potentially increasing response rates to immuno-oncology.While any clinical trials resulting from this work are several years away,the study illustrates that much is being done in early-stage research anddevelopment, which could lead to the cancer drugs of the future. Addi-tionally, governments continue to allocate financial and other resources toearly-stage research, both directly and through public-private coordination.However, despite efforts such as the "cancer moonshot" program recentlyannounced by US President Obama, we continue to caution that the com-plexity of cancer biology means it is highly unlikely a single "golden bullet"will be found to cure the disease.

ConclusionWe continue to see the most investable cancer-related opportunities intherapeutics; ongoing developments in immuno-oncology are indicative ofthe range of progress being made and support our belief that the marketfor cancer therapeutics could exceed USD 150bn by 2020, up from aroundUSD 100bn currently. Longer-term, we see the market growing in the midto high single digits beyond then, as a wider range of cancer types becomestreatable and patients survive longer. While it may be too early to pickwinners in some therapeutic areas, a diversified portfolio of pharmaceuticaland biotechnology companies with exposure to the theme should deliverabove-GDP earnings growth over the medium to long term. The long-termnature of drug development also provides an opportunity for long-terminvestors to capture an illiquidity premium through private market invest-ments in the area.

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

Box 1: Sustainability angleInvesting in oncology therapeutics fits our sustainable

investing framework. Despite significant advances, cancer

remains a leading cause of death and generates among

the highest costs to healthcare systems around the globe.

As with many serious diseases, the economic burden of

cancer far exceeds the direct cost of treating the disease.

Investing in oncology could help to reduce this rising

cost to society. For more information about the UBS

Sustainable Investing framework, please see our reports

"Adding value(s) to investing" published in March 2015,

and "What to focus on in the years ahead," published in

January 2016.

* Note: "Clonal neoantigens elicit T-cell blockade immunoreactivity andsensitivity to immune checkpoint blockade," Quezada, Swanton et al,Science, 3 March 2016

Longer Term Investments

UBS CIO WM 25 April 2016 2

Oncology basicsCancer is a leading cause of death and generates among the highest coststo healthcare systems around the globe. According to the World CancerReport 2014, published by the World Health Organization (WHO), over14 million new cases of cancer (excluding non-melanoma skin cancers)and over eight million cancer deaths occurred globally in 2012. The WHOfurther estimated the annual global financial cost of cancer at USD 1.16trillion in 2010, with the cost and occurrence expected to rise steadily giventhe ever aging population worldwide.

In its simplest terms, cancer is uncontrolled cell growth. It starts when cells,for genetic, environmental (e.g. sun exposure), life-style (smoking, diet) oreven unknown factors, become abnormal and grow out of control. Somecancers, like leukemias and lymphomas, affect the blood stream and blood-forming organs, while other cancers invade normal tissues and can spreadthroughout the body.

The most common types of cancer in men are lung, prostate, colorectal andstomach cancer, and in women breast, colorectal, lung and cervical (Fig. 3),although less severe forms of skin cancer would dominate if also taken intoaccount. These cancers, along with blood-borne cancers like leukemia andlymphoma, are among the largest therapeutic markets for pharmaceuticaland biotechnology companies today.

There are over 100 known forms of cancer, each with its own biologicaland life-altering characteristics. Treatment often requires multiple rounds ofvarious combination therapies – surgery, chemotherapy, immunotherapy,targeted drug therapy, etc. – to modify disease progression, which com-monly means increasing life expectancy by a matter of months.

Given the complexity of the disease, it is unlikely that we will ever finda "golden bullet" that cures cancer. However, scientific progress in bothdiagnosis and treatment has led to a better outlook for cancer patientsover the past few decades. According to the American Cancer Society, thefive-year survival rate for all cancers diagnosed between 2004 and 2010increased to 68%, up from 49% in 1975 to 1977. While there are somenotable success stories, such as prostate and breast cancer, survival ratesfor some hard-to-treat cancers remain low. Five-year relative survival ratesfor lung cancer are 18%, compared to 12% 40 years ago, while pancreaticcancer five-year survival is just 7% for patients diagnosed between 2004and 2010, as compared to 3% for patients diagnosed between 1975 and1977. Clearly, the need for new and better treatments for these cancertypes is as great as ever.

Fig. 3: Cancer in the US – incidence, preva-lence and five-year survival ratesA) Incidence: new cancer cases in 2015

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Note: Incidence - number of new cases estimated in 2015; Prevalence -cumulative number of patients alive with disease based on 2012 dataSource: National Cancer Institute, SEER database, UBS. Data as of August2015.



The evolution of cancer treatment is justbeginningCancer treatment evolved relatively slowly until the last two decades (Fig.4), with most advances in surgery, radiotherapy and chemotherapy offeringonly incremental improvements in survival compared with previous treat-ments. More recently, a better understanding of cancer cell biology andthe immune system has led to the development of immuno-oncology, anapproach that uses the body's immune system to fight cancer. Immuno-oncology treatment offers the hope of more durable responses to treatmentthan conventional therapy (Fig. 5) but also has the benefit of significantlyreducing the burden of side effects. The first immuno-oncology drugs toreach the market are the so-called checkpoint inhibitors. The benefits ofthese drugs include:

• Improved patient survival rates. For example, melanoma pro-gression-free survival has improved from typically just a few weeks withtraditional chemotherapy, to 2.9 months with ipilimumab, 6.9 monthswith nivolumab, and more recently 11.5 months using nivolumab andipilimumab in combination.

• Improved safety profile compared to traditional chemotherapy.

• Improved quality of life during treatment.

These drugs have rapidly established themselves as standard of care inadvanced lung cancer, with sales of the two approved PD-1 inhibitors(nivolumab and pembrolizumab) annualizing at nearly USD 3bn combinedin less than two years on the market. We expect the next important stepin the commercial evolution of checkpoint inhibitors to be the expansionof their use into earlier-stage disease. Large-scale trials of nivolumab andpembrolizumab in first-line lung cancer are scheduled to be published laterthis year.

The PD-1 and related PD-L1 inhibitor drugs look set to become thebackbone of treatment for many cancer types over the next few years. Theirrelatively benign safety profile suggests they could be used in combinationwith existing chemotherapies or other immuno-oncology drugs, which actto boost the immune system or suppress a tumor's ability to evade attack.Results of such trials will start to emerge within the next year, providinginsight into which of the many combinations currently being studied havethe most potential. Work is also ongoing to establish diagnostic proceduresto identify the patients most likely to benefit from each drug and combi-nation.

Checkpoint inhibitors do not work for all patients, but can produce deepand long-lasting responses to treatment in some cases. The hope is thatthis can effectively turn cancer into a chronic disease for these patients.Beyond checkpoint inhibitors, research continues on a wide range of otherapproaches that could dramatically change the prognosis in certain cancertypes. Personalized immuno-oncology using modified T-cells (known asCAR-T) has already demonstrated some success in the clinic, and couldreach the market as soon as 2017. Cancer vaccines and oncolytic viraltherapies have seen limited success so far, but further developments areunderway in both of these technically complex areas, and the emergingfield of epigenetics could lead to new drugs able to augment treatmentwith checkpoint inhibitors.

We provide an updated discussion of some of these potential treatmentsin the Appendix below.

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

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Source: UBS

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

Source: Credit Suisse, UBS. Note: for illustration only, not based on actualdata



Investment conclusionWe expect cancer incidence to continue to outpace population growth asthe global population ages, providing a multi-decade opportunity for com-panies able to develop new treatments to extend and improve the quality oflife of cancer sufferers. A number of technological developments, under-pinned by a better understanding of cancer biology and the human immunesystem, should lead to the emergence of new treatments. We estimatethat the global oncology drugs market, currently around USD 100bn, couldexceed USD 150bn by 2020 and continue growing in the mid to high singledigits beyond then, as a wider range of cancer types become treatable andpatients survive longer.

We see two primary routes to invest in the theme, i.e. the longer-termfuture of oncology development. First, pharmaceutical and biotechnologycompanies developing drugs through the later stages of clinical devel-opment, from proof of concept to launch, and successfully commercializingthem, can be expected to grow earnings above GDP independent of theeconomic cycle. Second, significant value can be captured at the earlierstage of drug development at the pre-proof of concept stage. These invest-ments have a different risk profile and are more suitable for private marketinvestments (Box 2).

Our theme includes both sustainably profitable large-cap pharma andbiotech companies, and smaller, development stage companies with drugcandidates in clinical development but limited revenues or earnings. Thetheme in total is growth-oriented, with little economic sensitivity to the fun-damentals. However, the ability of development-stage companies to raisenecessary capital can be linked to the broader economic environment viathe accessibility of capital market financing.

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 in clinical devel-opment, encounter regulatory issues or fail in post-approval com-merce. This risk can be mitigated, but not eliminated, by focusing ondrugs with demonstrated proof of concept.

• Drug pricing. Investors are increasingly concerned about perceivedpressure on drug prices in the US, which remains the only majorcountry where drug prices are set by the market, following widespreadmedia and political criticism of drug price inflation. The legal and reg-ulatory process surrounding drug price negotiation by the US gov-ernment is complicated, but we believe is unlikely to change in theshort to medium term, meaning manufacturers will remain free tocharge the prices that the market will bear for drugs. Rising drugbills will undoubtedly lead to greater pressure from insurers and otherpayers, but in our view truly differentiated drugs are likely to go oncommanding a premium. However, over the long term we cannot ruleout changes to pricing dynamics.

• Regulatory environment. A key support of the recovery in R&D pro-ductivity seen by the pharma industry in the last five years has been amore supportive and pro-industry regulatory environment, particularlythat of the US Food & Drug Administration (FDA). The FDA was seenas too risk-averse and reluctant to approve innovative new drugs, buthas since introduced new approval pathways and financial incentives



for innovation. In the event of an increase in reported adverse eventsperceived to be linked to these changes, the FDA could come underpressure to return to its earlier risk-averse days, particularly if its lead-ership or the political backdrop is less pro-industry in the future.

• Market risks. The biotechnology sector is sensitive to changes in riskattitude, in particular the availability of finance for development-stagecompanies, while the broader healthcare sector's performance has his-torically been negatively correlated to bond yields. However, over thelong-term horizon of our theme, we expect fundamentals to dom-inate.

Box 2: Private market investments in oncology, by Simon Smiles, CIO UHNW

In the sphere of cancer treatment, there are two key financing obstacles that present a potential opportunity for private markets investors.

The first obstacle concerns affordability – particularly in emerging markets, where average incomes are lower. With public financing in emerging

markets coming under increasing pressure, private investors have a chance to step in and offer separate for-profit solutions, in addition to similar

activity by listed companies.

The second obstacle is connected with developing treatments. Today, several pharmaceutical and biotechnology companies are testing novel

cancer drug candidates in late-stage clinical trials – many of which we believe will be on the market over the next two years and ultimately have

multi-billion-dollar sales potential.

However, studies (Fagnan, Fernandez, Lo, and Stein (2013)) have highlighted that the quarterly earnings cycle, real-time pricing, and constant

scrutiny of corporate performance from shareholders have encouraged pharmaceutical companies to focus on projects with clearer and more

immediate payoffs at the expense of more speculative but potentially transformative and lucrative research.

As a result, funding for the riskiest segment of the drug-development process – the translational phase between basic research and human clinical

trials – is severely limited. For example, the aforementioned study revealed that only USD 6-7 billion was spent on translational efforts, while USD

48 billion was spent on basic research, and USD 125 billion was spent on clinical development in the year under examination.

Long-term investors can help overcome these financial and social obstacles by embracing impact investing, or private investment strategies that

aim to achieve a social impact as well as a competitive financial return. By agreeing to commit capital for multi-year periods, investors can help

plug intermediate gaps in the drug development process. They can also seek to earn a venture capital-style profit in cases where the relevant

drugs are brought to market. Moreover, they can commit to reinvesting a portion of revenues in improving access to treatment in emerging

markets and elsewhere.

For ultra high net worth investors, impact investing is a particularly attractive solution. Ultra-wealthy individuals have more spare capital than

average as well as fewer potential short-term cash flow needs. As a result, they can afford to lock up more capital in longer-term opportunities.

In particular, impact investing gives them a chance to earn a long-term return at the same time as aligning their portfolios with their personal

values and social concerns.



Appendix: Cancer treatment – past, present andfuture

Twentieth century cancer treatmentThe first line of cancer treatment, from ancient times to the present day, hasbeen to attempt surgical removal of malignant tumors (Fig. 4 above). Theresult, however, can be temporary; the tumor often grows back. For thisreason, there is a pervasive belief that cancer cannot be cured. There are,however, many more cancer treatment options beyond surgery. In the late19th century, radiation (x-rays) was discovered and subsequently used incancer treatment. Also in the 19th century, the effect of specific hormoneson certain cancers was discovered, establishing the groundwork for themodern use of hormone therapy that took off in the 20th century. DuringWorld War 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 effective treat-ments, with better survival outcomes and improved quality of life, havecome to the fore. During the second half of the 20th century, the under-standing of the immune system and the biology of cancer advanced signif-icantly and led to what we now call immunotherapy. Initially this includedbiotechnological development of substances like interferons, interleukins,and other cytokines aimed at boosting a patient's immune system.

Around the turn of the millennium, this approach was followed by thedevelopment of techniques that identified specific tumor targets and aimedantibodies at these tumors, thereby hindering tumor growth. These so-called recombinant monoclonal antibodies, and tyrosine kinase inhibitors(TKIs, small molecules targeting specific cancer cells) are now used routinelyin cancer therapy, often in combination with older cancer therapies, andhave led to better survival rates and improved quality of life.

The emergence of immuno-oncologyThe common thread linking most recent developments in cancer care is abetter understanding of the immune system. It has actually been knownfor a century or more that the immune system could play a role in cancertreatment, but the scientific developments allowing us to take advantageof this knowledge are much more recent. The interferons described above,developed in the 1980s and 1990s, were an early form of immunotherapy.Later, recombinant monoclonal antibodies were developed to target tumorsdirectly, such as the anti-B cell therapy rituximab for non-Hodgkin's lym-phoma.

The most recent developments involve the T-cell part of the immunesystem, and appear to represent a step-change in treatment for somepatients. In particular, the so-called checkpoint inhibitors, drugs that blocka cancer cell's ability to defend itself from the immune system, have showndurable responses and improved survival rates in a subset of melanomaand lung cancer patients. Compared to traditional chemotherapy, the sideeffect profile of checkpoint inhibitors is relatively benign, offering improvedquality of life for patients.

The first therapeutic checkpoint inhibitor, the CTLA-4 inhibitor ipilimumab,was approved to treat melanoma in 2011. In 2014, two checkpointinhibitors targeting PD-1, nivolumab and pembrolizumab, were approvedto treat late-stage melanoma. In 2015, these approvals were extended to



treatment of earlier-stage melanoma, late-stage non-small cell lung cancer(NSCLC), and, for nivolumab, refractory kidney cancer. These drugs arerapidly establishing themselves as standard of care, being used in an esti-mated two-thirds of second-line NSCLC patients, and combined sales arealready annualizing at nearly USD 3bn. Both drugs are also being studiedas treatments for earlier-stage lung cancer; data for this commerciallyimportant setting should become available during 2016.

Beyond nivolumab and pembrolizumab, three drugs in the related PD-L1 inhibitor class are currently in Phase III trials, and more PD-1s are atearlier stages of development. Over 30 different cancer types are being tar-geted: beyond melanoma and lung cancer, checkpoint inhibitors have sofar shown early evidence of benefit in bladder, ovarian, gastric, head andneck, and liver cancer, among others.

While the checkpoint inhibitors have demonstrated impressive efficacy insome patients, a key feature of these drugs is their relatively benign sideeffect profile. This allows them to be combined with almost any othertype of treatment: chemotherapy, TKI’s, cancer vaccines, and in particularother immuno-oncology drugs. Multiple mechanisms of action are usedtogether routinely in oncology, due to the potential for synergistic effects.A similar benefit could be seen with the use of multiple immuno-oncologydrugs: it is hypothesized that other treatments could stimulate the tumorto be in a more immunogenic state, increasing the tumor's sensitivity totreatment with checkpoint inhibitors. Nivolumab is already approved foruse together with ipilimumab in melanoma treatment, and the past yearhas seen an explosion of trials studying various combinations of immuno-oncology drugs, particularly of PD-1/PD-L1 inhibitors with newer agents.Data from trials of these so-called "immuno-oncology doublets" will beginto emerge this year, providing insight into which combinations are mosteffective, and against which tumors.

Immuno-oncology: The next waveThe checkpoint inhibitors described above have demonstrated impressiveresponse rates (i.e. reduction of tumor size) and are beginning to deliversurvival benefits. However, many patients still do not respond, leadingresearchers to explore new mechanisms of boosting the immune system,or slowing down the cancer's ability to evade it. Unlike traditionalchemotherapy, or even antibodies directly targeting tumors, which typicallyhave severe toxicity that limits use in combinations, immuno-oncology'sside effect profile is generally more benign. This allows many of thesenew drug candidates to be explored in combination with the checkpointinhibitors.

We currently expect that some of these new drugs will emerge asthe "second wave" of immuno-oncology drugs, potentially reaching themarket over the next 3-5 years. Below we describe in brief some of thekey potential candidates. However, we emphasize that many of theseapproaches remain at an early stage of development, often with limiteddata in the public domain, making it impossible to effectively assess anyindividual drug's chances of clinical or commercial success.

• IDO inhibitors may be the next-closest target to market. IDO is anenzyme found near cancer cells which contributes to tumors' abilityto fight off the immune cells. IDO inhibitors are drugs that act toblock the effect of IDO, thereby allowing the immune cells to attackthe tumor. The most clinically-advanced IDO inhibitor, epacadostat,is expected to enter Phase III trials in the first half of 2016 in combi-



nation with PD-1 inhibitor pembrolizumab as a treatment for first-linemelanoma. Epacadostat is also being studied in multiple Phase II trialsacross various tumor types, in combination with nivolumab, as well asthe PD-L1 inhibitors atezolizumab and durvalumab.

• OX40. In contrast to targeting PD(L)-1s and IDO, which can be seen asmethods of removing barriers put up by tumors against the immunesystem, OX40 and other mechanisms are more akin to strength-ening the effect of the immune system. Specifically, OX40 is believedto enhance anti-tumor activity by increasing the presence of CD4and CD8 T-cells. While OX40 has so far shown limited efficacy as amonotherapy, it holds promise as a component of immuno-oncologydoublets, and OX40 candidates are currently being studied in com-bination with several chemotherapies and checkpoint inhibitors. Firstclinical data from combinations of OX40 drugs with PD-L1 inhibitorsshould be available during 2016.

• LAG3 is believed to modulate the activity of PD-1+ cells and regulateimmune T-cell response. Preclinical data suggest targeting LAG3 inaddition to PD-1 improves tumor response rates compared to eithermechanism alone, but clinical data thus far are limited. The mostadvanced LAG3 candidate is in Phase II trials for breast cancer inaddition to chemotherapy, and is also being studied with cancer vac-cines.

• CSF1R is a kinase present in certain types of immune cells and impli-cated in several disease groups including inflammatory disease andcancer. Inhibiting CSF1R has been shown to augment the anti-tumorresponse of immuno-oncology drugs in preclinical models. The mostadvanced CSF1R inhibitor, pexidartinib, is in Phase III trials for a raresoft-tissue tumor (TGCT) and Phase II for brain cancer, breast cancerand others. It could reach the market in 2018.

• Anti-KIR is an approach harnessing the body's own so-called naturalkiller cells, part of the innate or non-specific immune system. Blockingthe KIR receptors allows the activation of natural killer cells which thenattack the tumor. The most advanced drug targeting KIR is lirilumab,currently in a range of Phase II studies with nivolumab and other com-bination drugs against several cancer types including lung cancer andleukemia.

• GITR is a receptor found on the surface of several types of immunecells. Activating GITR boosts the number and strength of T-cells, aswell as increasing the activity of other immune cells including B-cellsand natural killer cells. Several GITR-targeting drugs are in early clinicaldevelopment for melanoma and other cancer types.

Initial data on all of the approaches above, either as monotherapy orin combination with other checkpoint inhibitors, could be published atmedical conferences in 2016. Beyond these more visible targets, theimmuno-oncology universe continues to expand rapidly: we are aware ofover 20 additional checkpoints/antigens being targeted in clinical trialsalone, while even more approaches are under investigation in pre-clinicalstudies. Table 1 lists several of the key potential competitors in the secondwave of immuno-oncology drugs.



Table 1: Current and future immuno-oncology pipeline

Mechanism Drug Status Cancer type(s) where disclosed

First wave

CTLA-4 Yervoy (ipilimumab) Approved Melanoma

CTLA-4 tremelimumab Phase III NSCLC, others

CTLA-4 AGEN-1884 Phase I

PD-1 Opdivo (nivolumab) Approved Melanoma, NSCLC, kidney, others

PD-1 Keytruda (pembrolizumab) Approved Melanoma, NSCLC, others

PD-1 REGN2810 / SAR439684 Phase I

PD-1 MEDI-0680 Phase I

PD-1 SHR1210 Phase I

PD-L1 atezolizumab Phase III NSCLC, bladder, others

PD-L1 durvalumab Phase III NSCLC, melanoma, others

PD-L1 avelumab Phase III NSCLC, stomach, others

PD-L1 BMS-936559 Phase I

Potential second wave - key mechanisms of action

IDO epacadostat Phase II NSCLC, melanoma, others

IDO indoximod Phase II Breast, prostate, others

IDO NLG919 / RG6078 Phase I

OX40 MEDI-6383 Phase II

OX40 MEDI-0562 Phase I

OX40 Anti-OX40 Phase I

OX40 RG7888 Phase I

LAG3 IMP321 Phase II Breast, melanoma

LAG3 LAG525 Phase I

LAG3 BMS-986016 Phase I

CSF1R pexidartinib Phase III Breast, ovarian, othersCSF1R emactuzumab (RG7155) Phase I/II Synovial tumours, othersCSF1R IMC-CS4 Phase ICSF1R FPA008 Phase I NSCLC, melanoma, othersCSF1R AMG820 Phase ICSF1R ARRY-382 Phase ICSF1R Anti-CSF1R Phase ICSF1R BLZ945 Phase I

KIR lirilumab Phase II Leukemia, othersKIR IPH4102 Phase I Lymphoma

Source: UBS. Note: Only clinical stage drug candidates shown. As of April 2016.



Table 1: Current and future immuno-oncology pipeline (continued)

Mechanism Drug Status Cancer type(s) where disclosed

GITR TRX518 Phase IGITR LKZ145 Phase IGITR Anti-GITR Phase IGITR MK-4166 Phase IGITR MEDI-1873 Phase IOther mechanismsAnti-PS bavituximab Phase III NSCLCB7-H3 enoblituzumab (MGA271) Phase ICCR2 PF-4136309 Phase ICCR4 mogalizumab Phase ICD-20 Di-Leu16-IL2 Phase I/IICD-20 TG-1101 Phase I LymphomaCD-27 varilumab Phase I/II NSCLC, othersCD-40 BMS-986090 Phase ICD-40 RG7876 Phase ICD-40 lucatumumab Phase I Leukemia, lymphomaCD-40 SEA-CD40 Phase I Leukemia, lymphomaCD-47 CC-90002 Phase ICD-70 ARGX-110 Phase ICD-73 MEDI-9447 Phase ICD-137 urelumab Phase I Colorectal cancer, head & neckCD-137 PF-05082566 Phase ICEA MEDI-565 Phase ICEA RG7813 Phase ICF289 / TLR9 lefitolimod (MGN1703) Phase IIICXCR4 ulocuplumab Phase ICXCR4 LY2510924 Phase IIFGFR2b FPA144 Phase I StomachFMS / TRK PLX7486 Phase I PancreaticGPCR CPI-444 Phase IIL10 AM0010 Phase I Melanoma, NSCLCNKG2A monalizumab (IPH2201) Phase IISTAT3 AZD9150 Phase II Head & neck, blood cancersTNFRSF25 PTX-25 Phase I

Source: UBS. Note: Only clinical stage drug candidates shown. As of April 2016.



CAR-T and novel personalized therapiesDespite the impressive improvement in survival seen so far with check-point inhibitors, these treatments and their follow-ons do not yet rep-resent a “cure” for cancer. One area of development that could offer sucha hope, admittedly only in limited circumstances, is the development ofpersonalized cellular immunotherapy including CAR-T treatment and T-cellreceptors.

CAR-T treatment combines the cytotoxic (i.e. cell-killing) ability of T-cells(a type of white blood cell responsible for fighting infections) with the tar-geted nature of monoclonal antibodies. Treatment involves a three-stepprocess:

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-Ts) are reintroduced to the patient where theymultiply and attack the targeted cancer cells

This approach has shown remarkable but early evidence of efficacy inleukemia. For example, previously-reported data from an ongoing PhaseII trial of one CAR-T therapy showed that 55 out of 59 children (93%)with leukemia had complete responses to treatment, and 79% of patientswere still alive a year after treatment. The trial has been extended to addadditional patients in Europe, and if successful could see the drug filed forapproval in 2017, and commercially available in 2018. Results in lymphomaare less promising so far, with data on just 26 patients available.

A number of issues need to be resolved before CAR-T therapy becomes acommercial reality. We expect safety to be a key challenge, particularly insolid tumor indications, due to the significant impact of CAR-T treatmenton the patient's immune system (known as cytokine release syndrome orCRS). Clinical experience so far suggests that this is manageable, and thatin the real world, where patients may be treated earlier than they havebeen so far in clinical trials, CRS could be more easily managed. Also, thenature of CAR-T treatment introduces technical hurdles in manufacturing,notably consistency and security of supply, since each treatment is unique toa single patient. Several companies are developing new CAR-T approachesthat could reduce these safety and manufacturing challenges, although weare unaware of any to have reached the clinic as yet. Nevertheless, if thesechallenges can be overcome, the potential for personalized immunother-apies is great, in our view.

One widely publicized case study, announced in November 2015, success-fully used an "off-the-shelf" universal CAR-T therapy to treat an 11-month-old leukemia patient resistant to other T-cell approaches. After a single doseof the treatment, a bone marrow transplant and several months' treatmentto manage immune-related side effects, the patient appeared to be in com-plete remission with no detectable leukemia cells. While this case historyappears to represent proof of concept for the "off-the-shelf" approach,we highlight that it is a single case and the treatment is many years frombecoming a commercial reality.

Alternative T-cell engineering approachesA number of alternative approaches are also under development in thebroader area of T-cell engineering, including:



• Bispecific T-cell engagers (BiTE) are antibodies that bind to both aspecific tumor cell and a T-cell, to direct the patient’s immune systemto the cancer. There is already an approved drug, blinatumomab, foracute lymphoblastic leukemia (ALL), using this technique. Thus far,data in ALL suggest that CAR-T has higher efficacy than the BiTEapproach, albeit at the cost of much worse side effects.

• Engineered T-cell receptors (TCRs) may be capable of targetingantigens inside, as well as on the surface of, tumor cells. This methodcould potentially be useful in treating solid tumors.

• Antibody-coupled T-cell receptors (ACTRs) are re-engineered T-cellsdesigned to be used alongside monoclonal antibodies.

T-cell based therapies, whether personalized or "off-the-shelf," holdtremendous promise as cancer treatments. However, as indicated above,these therapies are still relatively unproven, based only on small patientsamples, and face significant technical and commercial hurdles to adoption.Nevertheless, we believe the therapy deserves watching.

EpigeneticsThe emerging field of epigenetics refers to the ability to switch on or offcancer-related genes. Abnormalities in the way that genes are expressedby cells can occur independently of mutations in the underlying DNA;these abnormalities are now believed to also have a role to play in thedevelopment of certain cancers. Unlike mutations in DNA, which areessentially irreversible, gene expression patterns can be altered selectivelyand reversibly by targeting stages in the DNA decoding process, withoutimpacting the underlying DNA sequence. The hope is that the drugstargeting these processes are able to “prime” the immune system fortreatment, improving the effect of immuno-oncology drugs like checkpointinhibitors. Boosting response rates and increasing durability of responses tocheckpoint inhibitors and other immuno-oncology agents could dramati-cally increase the percentage of patients who live longer due to these drugs.Epigenetic drugs could also help patients overcoming acquired resistanceto oral cancer drugs or reduce the risk of relapse after these drugs.

Epigenetics is complex and at a relatively early stage of clinical development,meaning it is far too early to predict winners. Multiple mechanisms areunder investigation and many are likely to fail given a wide range of effects,leading to an as yet unclear safety profile (for example HDAC inhibitors arebelieved to impact the expression of over 300 genes). Entinostat is the mostclinically-advanced epigenetic treatment, in Phase III trials for breast cancer,and earlier stages of development as combination with immuno-oncologycheckpoint inhibitors in NSCLC and melanoma.

Other technologies and opportunitiesOncology is a broad and exciting field and, while immuno-oncology is cur-rently capturing much of the limelight (for good reason), many companiesare exploring other approaches with varying degrees of overlap. Some arealready on the market, while others are little more than academic con-cepts that could lead to the groundbreaking treatments of the next decade,although we cannot yet say which are the most commercially promising.Nevertheless, below we point to some areas of interest.

• Oncolytic viral therapies are based on a virus which replicatesitself inside the tumor cells, causing them to rupture and die. It isbelieved that this provokes an anti-tumor immune response, althoughthe precise mechanism of action of the only approved oncolytictherapy, talimogene laherparepvec, is not well understood. These



treatments may have limited potential as monotherapies (talimogenelaherparepvec reduces tumor burden but so far has not demonstrateda survival benefit), but are being studied in combination with check-point inhibitors, which may yield better results. For instance, tal-imogene laherparepvec is being studied in combination with both twocheckpoint inhibitors, pembrolizumab and atezolizumab, in a varietyof tumor types. As with other immune-mediating therapies, a potentialhurdle to the development of oncolytic viral therapies is the safetyprofile.

• Cancer vaccines. Once an area of intense investor excitement, cancervaccines have largely faded from investors’ consciousness over thelast few years following the lack of commercial success of an olderprostate cancer vaccine, sipuleucel-T. Like traditional vaccines, cancervaccines stimulate the immune system to respond to an antigen anddestroy the foreign cells. In the case of a cancer vaccine, the antigenin question is related to the tumor cells, with the aim of generatingan antitumor immune response. This could be a particularly profitableapproach in combination with immuno-oncology drugs designed toprovoke a natural immune response to the tumor. One example of thenewer generation of cancer vaccines is axalimogene filolisbac, in PhaseIII trials for adjuvant treatment of cervical cancer and also being studiedin metastatic disease in combination with checkpoint inhibitors.

• "Probodies” are a type of antibody designed to remain inactive in cir-culation until they reach a targeted tumor. Conceptually, this is similarto a prodrug, or compound that is inactive in the body until metabo-lized by certain enzymes at the target site, where it turns into an activedrug. Probodies could in theory be designed to target a wide rangeof tumor types, and given their high level of specificity could offersignificant efficacy improvements compared to traditional antibodies.However, the technique remains early stage; we are not yet aware ofany approach to have reached the clinic.

• Classical oncology. Developments continue in more traditional formsof oncology therapy, including hormonal therapy, chemotherapy, andtargeted antibodies, all of which remain significant opportunities forpharma and biotech companies.

• Genomics and diagnostics. It is hard to ignore the impact that devel-opments in genomics, in particular next-generation sequencing (NGS),are having on cancer treatment. The ability to rapidly and cost-effec-tively analyze the genetic make-up of tumors has transformed bothcancer research and clinical diagnostics, and is likely to continue doingso with the introduction of new technologies such as liquid biopsiespotentially changing clinical practice in the next decade. We recognizethese developments, but for the purposes of this theme have chosento focus on cancer therapeutics, as we see several other applications ofNGS technology beyond cancer including infectious disease screening,prenatal testing, and even agricultural uses.



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 productp.a. Per annum (per year) Shares o/s Shares outstandingUP Underperform: The stock is expected to

underperform the sector benchmarkCIO UBS WM Chief Investment Office

x multiple / multiplicator



Appendix

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