TABLE OF CONTENTS Newsletter.pdf · Oral Remodulin United Therapeutics Pulmonary Arterial Hypertension POTENTIAL BIOTECH DRUG APPROVALS IN 2012. NEWSLETTER SECOND QUARTER 2012

NEWSLETTER JULY 2012

TABLE OF CONTENTS

HEALTHCARE MARKET REVIEW AND OUTLOOK .... 1

WHERE DRUGS MEET DEVICES – NEW TECHNOLO-GIES HIGHLIGHT SYNERGISTIC VALUE .............. 4

ABOUT SECTORAL ASSET MANAGEMENT ......... 12

HEALTHCARE MARKET REVIEW AND OUTLOOK

Keeping pace with the ongoing European fiscal drama,

risk appetite fluctuated during the quarter, first

driving global equity markets down before rebounding

in the second half of June. In the end, the MSCI World

Index dropped 5.6% during the quarter, erasing most

YTD gains. In this volatile environment, healthcare

stocks lived up to their defensive role, with the MSCI

World Healthcare Index ending the quarter up 1.1%,

leaving the sector ahead of global markets YTD.

Within the group, big pharma held its ground, while

most risky subgroups, such as small caps, emerging

market healthcare stocks, generic players, and

medtechs, lost more ground. The sole exception was

mid- and large-cap biotech, which rose by 4.5% (as

measured by the MSCI World Biotech Index), thanks to

a particularly positive news flow.

The most anticipated legal / regulatory decision came

in the last days of the quarter, as the US Supreme

Court ruled 5-4 to uphold the Affordable Care Act

(«ObamaCare»), asserting that the individual mandate

was a constitutionally sanctioned tax. Thus, the law

will essentially stand as it is. No additional effects on

pharma, biotechs, generics, and medtechs are

anticipated from the June 28 announcement; the

levies will remain, and the industry can now look

forward to increasing volumes in the years ahead. The

decision is a slight negative for managed care, as

HMOs will have to take on both good and bad risks.

Hospitals stand to benefit from the higher volumes

and guaranteed payments.

The best performers during the quarter were mid- and

large-cap biotech stocks. Their performance was

driven mainly by a couple of positive regulatory

decisions, including an FDA advisory committee’s

recommendation for lorcaserin (Arena) and its

subsequent approval by the agency, another advisory

committee recommendation for carfilzomib (Onyx),

and a number of meaningful positive clinical events.

Among them were very strong phase II data for GS-

7977 (Gilead) in combination with Bristol’s daclatasvir

ANNUALIZED VOLATILITY

1 MONTH 3 MONTH 6 MONTH 9 MONTH 12 MONTH 3 MONTH 6 MONTH

MSCI World Index 134.1 4.9% -5.6% 5.7% 13.2% -6.5% 15% 16%

MSCI World Healthcare Index 145.8 6.2% 1.1% 8.8% 17.4% 5.4% 12% 12%

MSCI World Pharma 124.2 7.2% 2.4% 6.3% 16.0% 6.6% 11% 12%

MSCI World Biotech 274.9 3.2% 4.5% 19.4% 30.0% 21.0% 18% 20%

MSCI World Equip and Suppl 144.8 5.6% -2.1% 10.5% 13.4% -2.2% 14% 15%

MSCI Emerging Mkt Healthcare 365.5 6.2% -0.5% 14.3% 10.6% -8.9% 15% 16%

CLOSE

6/30/2012INDEX

RETURN

NEWSLETTER SECOND QUARTER 2012

Page 2

in GT1 hepatitis C, positive interim and final phase II

data for Kalydeco and VX-809 in F508del cystic fibrosis

(Vertex), positive phase IIb data for baricitinib in

rheumatoid arthritis (Incyte), and favorable phase III

data for a number of compounds: macitentan in

pulmonary arterial hypertension (Actelion), Xiaflex in

Peyronie’s disease (Auxilium) and T-DM1 in breast

cancer (Immunogen). In addition, the strong launches

of Eylea (Regeneron), Kalydeco (Vertex) and Jakafi

(Incyte) contributed to the positive undertone. Also,

we note Biogen-Idec’s positive pipeline update and,

last but not least, continued M&A activity, with the

key events being Astra’s bid for Ardea, Glaxo’s

interest in Human Genome Sciences, and Bristol and

Astra’s acquisition of Amylin Pharmaceuticals.

However, the quarter was not devoid of upsets and

disappointments. The positive phase IIb data of

Lucentis and Ophthotech's Fovista in wet AMD was a

negative for Regeneron’s Eylea. Celgene stunned the

market with the withdrawal of its European filing for

front-line and maintenance applications for Revlimid,

thereby eliminating the company’s main source of

organic growth for the foreseeable future. Lastly,

Roche abandoned its bid for Illumina, a decision we

did not expect.

The rest of the year should remain rich in events for

biotechs. The focus will remain on a couple of key

new product launches including Provenge, Esbriet,

Eylea, Jakafi, Adcetris, Dificid, Bydureon, and

Kalydeco. In addition, multiple regulatory decisions

are expected, among them a number of blockbuster

opportunities that should help sustain investor

interest in the sector. Finally, we expect

the fall meetings in oncology and

virology to be key catalysts, as several

companies plan to release important

data.

In medtech, the second-quarter events

essentially confirmed the trends noted

earlier. The business environment

appeared to stabilize, but volume and

pricing trends continued to be unclear,

and Europe remained weak. There were

a couple of meaningful FDA advisory

panel recommendations, including

Heartware’s HVAD, Edward’s Sapien heart valve for

high-risk patients, and Cameron Health (Boston

Scientific) subcutaneous ICD system for sudden

cardiac arrest. We expect economic conditions to

remain key performance drivers for medtech stocks in

the months ahead, along with regulatory decisions for

Heartware’s HVAD, Edward’s Sapien heart valve,

Dexcom’s Gen IV sensor and Insulet’s EROS insulin

pump.

Generic drug makers in Japan saw a sharp increase in

April sales following the release of new incentives for

increasing the use of generic drugs. Fiscal Q1 results

will be key later this summer. In Europe, conditions

remain very difficult for generic drug makers, as

volume gains have not compensated for price cuts. In

the US, Teva recorded a key win for its Copaxone

patents, delaying generic competition until at least

2015. Finally, Watson announced the rumored

acquisition of Actavis, which should rapidly be

accretive. Actavis also scored a victory with their

approval of a generic for Adderall XR, one of Shire’s

key assets.

Pharma stocks continued to tread water; the only

notable events were the failure of Roche’s

dalcetrapib for the treatment of high cholesterol and

the surprising pushback (again) from the FDA on

approving Pfizer/Bristol-Myer’s best in class

bloodthinner Eliquis. Dalcetrapib marks the failure of

the first of the industry’s two most potentially

meaningful new product categories with clinical data

this year. The second will be Alzheimer’s disease –

DRUG COMPANY INDICATION

Linaclotide Ironwood IBS-C and Chronic Constipation

AMR-101 Amarin Very High Triglycerides

Carfilzomib Onyx Refractory Multiple Myeloma

Quad Gilead HIV

Degludec Novo Nordisk Type II Diabetes

Abraxane Celgene Non-Small Cell Lung Cancer

MDV3100 Medivation Prostate Cancer

BG-12 Biogen-Idec Multiple Sclerosis

Ponatinib Ariad Refractory CML

Oral Remodulin United Therapeutics Pulmonary Arterial Hypertension

POTENTIAL BIOTECH DRUG APPROVALS IN 2012


Page 3

with Elan, Johnson and Johnson and Pfizer’s

bapineuzumab and Eli Lilly’s solanezumab - which will

read out during the second half of the year. Finally,

we also expect to see further news from Glaxo’s

respiratory portfolio: positive initial phase III data for

the LAMA/LABA program were released on July 2nd.

In addition, we anticipate strong underlying demand

for mid- to high-tier hospitals in Asia and other

emerging regions. As expected, corporate activity is

high, and we should see IHH, the owner of Parkway

Hospitals (Singapore, Malaysia and Turkey) go public

in the next several months.

The caution we expressed after the strong Q1

performance of global markets was warranted.

Following the retreat observed during Q2 and the

incrementally positive developments in Europe at the

end of June, we feel a little bit more optimistic about

market conditions for the next couple of months.

Therefore, we are comfortable keeping our focus on

biotechnology, generics, and medical technology

stocks at the expense of big pharma. Even after the

relatively strong YTD showing of biotech stocks, we

continue to see the greatest potential for those

biotech companies on the cusp of a new product

launch or early in the launch phase. We expect the H2

2012 events highlighted above to be key performance

drivers. Among medical technology companies, we

remain committed to innovation-driven players able

to demonstrate the clinical value of their products.

Generics are a key component of our strategy,

particularly those companies with exposure in

emerging markets and Japan. We also are

incrementally more favorably inclined toward global

players, such as Watson (following the Actavis

acquisition) and Teva (after the Copaxone patent

ruling), which are both trading on attractive terms.

Finally, we favor using dips in emerging markets to

strategically add to exposure.

Michael Sjöström, CFA Chief Investment Officer

Based on Sectoral estimates / median numbers

SALES EPS PE12E EV/SALES12E COGS

Pharmaceuticals 2-4% 4-6% 12x 2.8x 15-20%

Generics 10-15% 10-15% 12x 2.0x 25-55%

Biotechs 15-20% 20-25% 14x 5.3x 10-20%

Medtechs 10-15% 15-20% 14x 2.4x 20-40%

GROWTH P.A. 2011-2014E


Page 4

WHERE DRUGS MEET DEVICES – NEW TECHNOLOGIES HIGHLIGHT SYNERGISTIC VALUE

Over the last few decades, medicine has been

transformed fundamentally by the advent of

minimally invasive devices, more precise diagnostic

tools, and better-targeted drugs for specific

pathological conditions. While this evolution has

occurred largely in silos, there has also been a keen

interest in leveraging existing knowledge to combine

multiple modalities to improve treatment outcomes.

In this report, we describe some of the recent

advances in medical technology and biotechnology

through which substantial therapeutic synergies may

be extracted, as well as offer a glimpse into the

future of such approaches.

CARDIOVASCULAR MEDICINE

The field of cardiovascular medicine has undergone

substantial changes with the introduction of new

anticoagulants, lipid-lowering drugs, and

interventional approaches in the treatment of

vascular compromise (most notably in the coronary

arteries).

CORONARY AND PERIPHERAL VASCULAR

The introduction of bare-metal stents was the first

attempt at improving coronary blood flow in patients

with substantial atherosclerotic burden, including

those with ruptured plaques in acute myocardial

infarction. Despite the considerable controversy that

emerged over the appropriateness of such treatment

in low risk, stable subpopulations, stents have

substantially modified the treatment algorithm, which

originally consisted of drugs designed to prevent

plaque build-up and stabilize existing plaques, as well

as anti-clotting agents developed to reduce the risk of

vascular occlusion upon plaque rupture. Adding an

anti-neoplastic medication to the stent was

subsequently shown to diminish the risk of restenosis,

thereby improving survival. This development led to

a dramatic market conversion to drug-eluting stents,

benefiting companies such as Abbott, Boston

Scientific, JNJ, and Medtronic. Today, the total

worldwide coronary stent market is estimated at

USD6bn. Worth noting is that bare-metal stents have

remained the leader in the peripheral vascular

market, as multiple drug-eluting stent trials have

failed to demonstrate clinical improvement. The only

drug-eluting stent that has received an FDA approval

for the treatment of peripheral lesions is Cook’s Zilver

PTX. It remains to be seen whether this platform will

gain broader adoption in the interventional

community.

In the future, the stent market is likely to see

increased use of anti-neoplastic drugs at the expense

of permanent device implantation. While the greatest

advances have historically occurred in the coronary

arteries, positive data on the use of drug-eluting

balloons in the peripheral arteries suggest an exciting

new application.

Figure 1: Zilver PTX data. Source: Cook Medical.

ZILVER PTX 12 MONTHS 24 MONTHS

Primary Patency (PSVR <2.0) 83.1% 74.8%

Provisional Stenting Primary

Patency (PSVR <2.0)89.9% 81.2%

Event-Free Survival 90.4% 86.6%

ZILVER PTX 12 MONTHS 24 MONTHS

Overall

Primary Patency (PSVR <2.5) 86.2%

Freedom from TLR 91.1% 84.3%

Patient Subgroup Primary Patencies (PSVR <2.5)

Diabetics 86%

Diabetics with Long Lesions 77%

Long Lesions (>15cm) 77%

In-Stent Restenosis 80%

SINGLE ARM TRIAL

RANDOMIZED TRIAL


Page 5

CR Bard’s acquisition of Lutonix in 4Q11 was the most

CR Bard’s acquisition of Lutonix in 4Q11 was the most

recent sign of increasing activity in this area. The

early data from this promising technology was

presented at the 2010 Transcatheter Cardiovascular

Therapeutics Conference. If successful, this therapy

could lead to a dramatic market conversion away

from the use of bare-metal stents in peripheral

lesions and possibly even drug-eluting stents in the

coronary arteries. CR Bard estimated that the value of

this market could reach USD1bn over the next

decade. Interestingly, this technology is likely to be

limited to lesions with low calcium burden, as drug

diffusion through mineralized tissue is difficult and

will likely result in poor outcomes. In such cases, a

pre-treatment with mechanical atherectomy may be

warranted to remove the calcified plague and allow

for effective drug delivery. At present, the greatest

benefactors of such a paradigm shift would be

Covidien and Cardiovascular Systems, with the

market-leading devices. Indeed, the potential for

treatment synergies motivated Bayer, which develops

drug-eluting balloons, to acquire Pathway Medical

Technologies in 3Q11.

CEREBROVASCULAR

Another closely related field, which traditionally has

been served solely by medical therapy and could soon

experience a sea change through the introduction of

treatment-augmenting devices, is ischemic stroke. In

Figure 2: Lutonix drug-eluting balloon data: Levant I

Late Lumen Loss at 6 Months. Source: Lutonix.

Figure 3: The Silverhawk plaque excision system.

Source: Covidien.

Figure 4: The Solitaire clot retrieval system. Source: Covidien.

0.461.09

0.45

1.19

0.490.9

0

2

MOXY PTA MOXY PTA MOXY PTA

mm

P= 0.016

N=39

Balloon Group

0.461.09

0.45

1.19

0.490.9

0

2


mm

P= 0.016

N=39

Balloon Group

Stent Group

0.461.09

0.45

1.19

0.490.9

0

2


mm

P= 0.016

N=39

Balloon Group

N=35

N=31

N=24

N=8

N=11

Stent Group

0.461.09

0.45

1.19

0.490.9

0

2


mm

P= 0.016

N=39

Balloon Group

N=35

N=31

N=24

N=8

N=11

Stent Group


Page 6

these events, a clot, which may originate in the

cranial vasculature or at a downstream location, leads

to target vessel occlusion, which inadvertently causes

neural damage. With nearly a million incidences of

ischemic stroke in the US alone, this condition has

long received considerable attention from researchers

and clinicians. However, treatment progress has thus

far been limited to the use of intravenous or

occasionally intra-arterial tissue plasminogen

activator (tPA), delivered in a narrow time window

from stroke onset.

Recent advancements in mechanical clot extraction

and revascularization appear to offer an effective

first-line treatment option in selected cases. Data

from Covidien’s Solitaire and early data from

Stryker’s Trevo clot-retrieval devices are the most

notable reports of superior efficacy and safety that is

comparable to the current standard of care.

Based on early clinical experience, the FDA granted

approval for the use of Solitaire in ischemic stroke

patients who are not candidates for anti-coagulation

in 1Q12. This device, along with others, has already

been in use in the EU, although the additional clinical

data provide much needed support for clinicians to

employ this technology on a wider basis. In the

future, we may witness nationwide efforts to better

coordinate interventional care for patients suffering

from ischemic stroke, as early intervention appears to

lead to superior outcomes and could reduce overall

healthcare costs, particularly in long-term

rehabilitation care. In time, the market for clot-

retrieval devices could exceed USD1bn in the US.

CARDIAC ELECTROPHYSIOLOGY

The introduction of active interventions in ischemic

stroke does not de-emphasize prevention efforts.

Since clots developing in the left cardiac atrium of

atrial fibrillation patients are one of the most

common causes of ischemic strokes, there has a

considerable focus on restoring normal electrical

conductivity of the cardiac tissue. Despite some

success with multiple anti-arrhythmic medications,

many patients are poorly controlled either due to

poor compliance or low efficacy. In order to augment

medical therapy, ablation technology has been

developed which is aimed at disrupting circuits of

abnormal electrical activity in the cardiac tissue

(most notably in the left atrium), thereby restoring

normal sinus rhythm. The market leaders in this field

are JNJ and St Jude, although new technologies, most

notably from Topera Medical, could become

important treatment options for clinicians if future

trials confirm early efficacy data. The findings were

impressive, particularly in the setting of long standing

persistent atrial fibrillation. We will certainly follow

the evolution of this field closely.

HYPERTENSION

The increasing prevalence of obesity in the Western

world, coupled with an aging population, has created

a tremendous market for the treatment of metabolic

syndrome X. Medical devices combined with drug

therapy have come to play an increasing role in first

and later lines of treatment for conditions such as

hypertension and diabetes. Despite the availability of

tailored multi-drug combination treatments for

Figure 5: The Topera medical ablation technology. Source: http://www.hrsonline.org.


Page 7

hypertension, many patients remain poorly

controlled, placing them at a risk for end-organ

damage.

Novel therapies to address drug-resistant

hypertension primarily target the sympathetic nervous

plexus surrounding the renal arteries, a treatment

known as renal denervation. The first indication of

the medical technology industry’s interest in this

space came with the announcement of Medtronic’s

acquisition of Ardian in 4Q10. The value of renal

denervation technology has been clarified by data

from Ardian’s HTN-1 and HTN-2 trials. The primary

objective of these trials was to demonstrate a

sustainable decrease in systolic and diastolic blood

pressure. Both trials succeeded in showing the

efficacy of radiofrequency renal artery ablation in a

drug-resistant patient population.

Since then, data from St Jude’s internally developed

program, Maya Medical (which was acquired by

Covidien), privately held Vessix Vascular and ReCor

Medical have become available. Boston Scientific is

also known to have a program in development, and

companies such as Kona Medical and CardioSonic are

in preclinical trials. The majority of approaches use

radiofrequency ablation, although ReCor, Kona, and

CardioSonic are based on an ultrasound platform.

Ultimately, the most successful technologies will need

to demonstrate good long-term efficacy data, offer

ease of use with a relatively short procedural time,

and show cost effectiveness. To date, balloon and

basket-based radiofrequency approaches have an

edge (Covidien, St Jude), although Medtronic’s first-

to-market position in the US cannot be disregarded. It

will also be interesting to follow the development of

ReCor, a balloon-based ultrasound system that is the

most advanced in clinical development in the non-

radiofrequency category. Using even conservative

scenarios for market penetration, these devices could

exceed annual sales of USD1bn in the US.

DIABETES MELLITUS

In diabetes mellitus, patients are offered multiple

established treatments, even as novel agents such as

GLP-1 agonists are regularly introduced. The goal of

these new therapies is to improve glycemic control,

offer a good safety profile, and be easy to use. While

orally administered drugs compete solely on the basis

of clinical performance, new developments in insulin

treatment have largely attempted to modify patient

behavior. In that respect, drug-device combination

designs have remained a key focus of research, as

every injectable drug by necessity requires

concomitant use of medical technology.

The most active area of emphasis has been the

conversion of syringe auto-injections to pump

applications. Together with the introduction of patch-

based glucose meters, the industry is now focusing on

the development of an “artificial pancreas”

treatment option, which will allow synchronization of

insulin administration with continuous glucose

measurement. The leading players here include

Insulet and Medtronic. The latter has already

introduced an insulin pump with continuous blood

Figure 6: Ardian renal denervation data. Source:

Medtronic.

COMPANY DENERVATION TECHNOLOGY US STATUS/CLINICAL STAGE

Medtronic Radiofrequency FDA Approved

St Jude Radiofrequency Clinical

Covidien Radiofrequency Clinical

Boston Scientific Undisclosed Preclinical

Vessix Vascular Radiofrequency Clinical

Kona Medical Ultrasound Preclinical

Cardiosonic Ultrasound Preclinical

Mercator MedSystems Pharmaceutical Preclinical

Table 1: Renal denervation technologies. Source:

Endovascular Today.


Page 8

glucose monitoring, and we are expecting a similar

launch from Insulet to occur in the near future.

With the global diabetes market exceeding USD200bn,

the insulin pump market (currently estimated at less

than USD1bn) should sustain its growth momentum.

Importantly, drug delivery devices are not limited to

the administration of insulin and will certainly play an

important role in fields now dominated by hospital-

based infusion centers, such as immunology and

oncology. Medtronic and Insulet have already

highlighted the potential for the use of pump

technology in these specialties. Other new concepts

in drug formulation, such as Halozyme’s hyaluronidase

platform, which also aim to offer patients the option

of self-administered biologic drug delivery, could

prove synergistic with these pump-based approaches.

ORTHOPEDICS/DEFORMITIES

Developments in orthopedics have been largely

oriented toward joint replacement implants for

osteoarthritis and new disease-modifying agents in

inflammatory conditions such as rheumatoid arthritis.

However, there has always been an interest in

refining orthopedic care through more effective use

of medical and surgical tools. Joint replacements

have been tremendously successful in helping patients

who are poorly managed with drugs alone, yet the

idea of preventing surgery by tissue regeneration

remains the Holy Grail. Treatments with hyaluronic

acid injections have been attempted periodically,

although the long-term results have been mixed. In

addition, much attention has been placed on cell-

based therapies for the regeneration of native

cartilage. While promising, it will take time for new

developments in this area to generate meaningful

data.

More rapid progress is occurring in certain areas of

orthopedics, and there are instances in which surgery,

once the gold standard, is being replaced with

pharmaceutical solutions. An interesting example is

Auxilium Pharmaceuticals’ Xiaflex, launched in 1Q10

for the treatment of Depuytren’s contracture. Xiaflex

is a collagenase that can aid in breaking down the

cord causing the contracture, which could until now

only be resolved with surgery. Xiaflex also

demonstrated encouraging efficacy in the IMPRESS I

and IMPRESS II trials in Peyronie’s disease. The drug

is now in the pre-approval phase in the US for this

condition. Note that Xiaflex’s mechanism of action

may prove advantageous in other conditions for which

surgery remains the only option, such as frozen

shoulder syndrome and lipomas. While clearly

valuable, these new therapies often require

substantial market-priming activities, such as

effective physician education programs and the

establishment of favorable reimbursement policies

prior to launch.

New drugs and biologics are also having an impact on

other areas of orthopedics, although in the majority

of instances, the effects have not been as profound as

with Xiaflex. Active agents often allow for enhanced

bone or tissue healing after surgery. One of the most

notable examples is Bone Morphogenetic Protein 2

(BMP-2), which Medtronic markets as Infuse. Despite

its effectiveness, substantial concerns have been

raised recently over its safety in spinal surgery.

These questions underscore the need for careful

evaluation of new pharmaceutical agents in

orthopedics. Nevertheless, we expect continued

development of therapies that accelerate bone and

soft-tissue healing and permit non-surgical

management of various deformities.

Figure 7: The Omnipod insulin pump. Source: Insulet.


Page 9

ONCOLOGY

One of the greatest advances in oncology in recent

years has been the introduction of targeted therapies.

The growing body of knowledge in cancer research

fostered the identification of multiple cancer-specific

antigens that differentiate malignant cells from their

normal environment. Targeted therapies can disrupt

cancer cells while having a minimal impact on normal

cells, thereby decreasing potential side effects and

allowing for the administration of higher drug

dosages. In doing so, these novel cancer drugs may

prove more effective in suppressing tumor growth.

Some of the most notable targeted therapies include

trastuzumab in Her2+ breast cancer and imatinib in

chronic myeloid leukemia, with a large pipeline of

products in development for the treatment of

multiple cancer types.

RADIATION ONCOLOGY

An area of increasing interest is combining radiation

therapy with chemotherapeutic agents, which permits

site selectivity based on predetermined physical

location rather than on molecular markers. Unlike

targeted therapies, the combination of chemo- and

radiation therapy is not dependent on the particular

molecular composition of the tumor. Further, the

combination can be used in a variety of tumor types,

however, on the other hand, only larger lesions are

suitable for treatment. Nevertheless the radiation

devices offered by companies such as Varian, Elekta

and Accuray, provide an increasing amount of

precision and accuracy, and result in superior

outcomes for a well-integrated chemo-radiation phase

of cancer treatment. In much the same way that

chemotherapy’s effect on healthy tissue limits the

effectiveness of the regimen, irradiation of structures

surrounding the tumor bed contributes to the overall

toxicity of the treatment. With the advent of

stereotactic, as well as image-guided radiation

treatment, such issues are becoming less limiting.

Early research on the role of radiation in oncology

focused on ways to integrate this technology in a

multi-modality treatment regimen (ie, surgery,

chemotherapy, radiation therapy) or apply it in a

palliative setting. New developments have

emphasized a growing understanding of the

synergistic value of radiation- and drug-induced

cytotoxicity, while seeking to determine whether a

more precise, higher intensity energy application can

offer a viable alternative to surgical resection. The

former involves looking at the ability of certain agents

to increase the responsiveness of tissue to radiation

treatment and designing drugs that could be

selectively activated in an irradiated area. In

addition, research suggests that there may be a

benefit to destroying a tumor mass with radiotherapy,

Figure 8: The Cyberknife system. Source: Accuray.

Figure 9: Early SBRT vs surgery data. Source: MD

Anderson.


Page 10

rather than using surgical resection if there is a

suspicion or evidence of early metastasis. The

hypothesis relies on the innate immune reaction to

the tumor antigens released into the blood stream

following radiation-induced tissue necrosis. As a

consequence, the immune system may better respond

against micro-metastases, a phenomenon that might

not occur with surgery.

The ability to replace surgery with radiation therapy

was made possible by the development of precise and

accurate energy applications. These advances include

stereotactic body radiation therapy (SBRT) and image

guided radiation therapy (IGRT). Early research in this

area focused on the treatment of non-metastatic

prostate cancer. The major objective was to minimize

the side effects associated with more invasive surgical

treatment, as well as with less precise hyper-

fractionated radiation applications. Further

investigations focused on organs such as the lung,

liver, and pancreas, where the use of image guidance

has the potential to synchronize treatment with the

breathing cycle. While a substantial body of research

has emerged on the role of SBRT and IGRT in these

settings, major trials have only recently begun to

determine if this technology has the potential to

serve as a first-line treatment of choice in

combination with drug therapy. The most exciting

developments may soon emerge in lung cancer

patients who are surgical candidates; at present, a

number of Radiation Therapy Treatment Group

(RTOG) trials are underway, using primarily Varian

and Elekta devices, as is the STARS trial, in which

clinicians use Accuray’s Cyberknife system

exclusively. These initiatives could not only provide

substantial validation of the structural selectivity of

new radiation oncology treatments (ie, their “surgical

precision”), but also shed light on the interplay of this

modality with drug-specific effects and natural

immune mechanisms. New clinical data, coupled with

substantial investments in healthcare infrastructure in

emerging markets, should support modest growth for

the USD3.5bn global radiation-oncology market.

MOLECULAR IMAGING

Along with the introduction of new technologies to

attain optimal tissue response, we are witnessing an

increasing emphasis on the development of

personalized treatment. Identifying individual genetic

and tumor-specific genotypic and phenotypic

characteristics matters immensely when employing

new targeted therapies. Biomarker testing is an

important element of cancer management, as it

allows for dynamic treatment modification. In

addition, recent imaging advances, such as the

integration of positron emission tomography into

existing modalities (most notably computed

tomography and magnetic resonance), facilitate

functional follow-up and progress assessment. A new

field of research focuses on biomarker imaging, which

combines the ability to selectively tag a cancer cell

based on its molecular characteristics with the

visualization of the attached molecule. In doing so,

the ensuing image has the potential to precisely

delineate the tumor burden. Such modalities may

enable clinicians to assess post-treatment tumor

behavior by looking not only at its metabolic but also

highly specific molecular characteristics. They will

also allow for imaging-based tracking of molecular

changes occurring within the cancer, which, in many

cases, correlate with disease progression and

treatment responsiveness.

The use of biomarkers as such is not new in oncology;

cancer-cell expression patterns have long been

helpful in grading and staging. Physicians have used

Figure 10: Merrimack biomarker imaging. Source:

Merrimack.


Page 11

these data to select the most appropriate treatment

regimen based on a risk/benefit analysis, as well as to

identify tumor-specific antigens, which creates an

opportunity to initiate a regimen that includes

targeted agents. Biomarkers are currently studied in

biopsy tissue samples or sequential lab testing (such

as blood or urine collection). There also is an

increasing interest in creating a molecular image of a

tumor by tagging specific biomarkers with agents that

can be detected with diagnostic devices. Such a

technology would enable a clinician to better

optimize treatment and identify risks based on the

physical location, as well as the chemical

characteristics of the lesion, and could also provide a

unique measure of treatment response. A growing

number of early- and late-stage oncology companies

are developing molecular imaging technologies as part

of their companion diagnostic offerings, all of which

are becoming essential tools in today’s era of

targeted therapies.

GENETICS AND GENOMICS

In addition to being paired with biotechnology in a

clinical setting, new medical technologies have

increasingly become key components of the drug

development process. Evolving genomic and

proteomic analysis has enabled researchers to better

understand disease mechanisms and design

appropriate drug candidates. There is no question

that the introduction of molecular diagnostic

technologies, particularly sequencing tools, has

revolutionized this area of biomedical research.

The leaders in this space, Illumina and Life

Technologies, offer advanced tools for genome

analysis. Many hope these innovations will soon

enable clinicians to personalize treatments based on a

patient’s specific genotypic and phenotypic

characteristics, particularly in the area of oncology.

However, many of the near term benefits may relate

to pre-clinical applications, with any acceleration of

the candidate drug-identification process having the

potential to lower initial investment costs for the

biopharmaceutical industry. Whether the

accumulating pool of data in genomics and proteomics

will translate into progress in clinical trials and, more

importantly, new drug approvals, remains to be seen.

We will follow the maturation of these technologies

with great interest.

CONCLUSIONS

In summary, these selected examples of the interplay

between medical technology and biotechnology

highlight an important trend that we believe is here

to stay: an increasing focus on extracting outcome

synergies from the concomitant and sequential use of

both approaches. In addition, the advent of

nanotechnology and the evolution of bioinformatics

offer the potential for considerable acceleration of

the discovery and personalization of new treatment

strategies. As these patterns emerge, we will

continue to seek out the best investment

opportunities based on products that offer clinical

value to patients and economic efficiency to

healthcare systems around the world. At the moment,

we view Covidien, Insulet, Varian and Illumina as well

positioned in their fields.

Michal Marszal, MD

Financial Analyst

Figure 11: The Illumina HiSeq2500 system. Source: Illumina.


ABOUT SECTORAL ASSET MANAGEMENT

Sectoral Asset Management is an SEC-registered

investment advisor based in Montreal whose focus is

managing global healthcare equity portfolios. Sectoral

has one of the world’s longest track records in

managing biotech equities and is a sub-advisor of

numerous healthcare and biotech funds offered by

partners in Europe, USA, Canada, Japan, Taiwan and

Korea. Sectoral has also launched an alternative

investment fund that offers an attractive exposure to

the growing healthcare/biotech sector through both

long and short positions. The firm’s assets are USD4.0

billion as of June 30, 2012.

Investment Professionals

Jérôme Pfund, CFA - Chief Executive Officer Marc-André Marcotte, CFA – Senior Financial Analyst

Michael Sjöström, CFA - Chief Investment Officer Mina Marmor, Ph.D., CFA - Financial Analyst

Pierre Gauthier, CFA - Senior Trader Michal Marszal, MD – Financial Analyst

Bandhna Mamak, CFA - Senior Manager Paulina Niewiadomska, CFA – Portfolio Manager

Jeffery Elliott, Ph.D. – Financial Analyst Vincent Ossipow, Ph.D. - Investment Manager

Maha Katabi, Ph.D., CFA – Investment Manager Stephan Patten, CFA – Senior Portfolio Manager

Jo-Wen Lin, MBA – Financial Analyst

Scientific Advisory Network

Under the supervision of Dr. Vincent Ossipow,

Sectoral has established a proprietary network of

talented researchers and clinicians in complementary

disciplines worldwide.

The Scientific Advisory Network (SAN) is designed to

support Sectoral with scientific due diligence in its

investment process. SAN’s members include:

Amanda Adler, MD, Ph.D. Epidemiology / Diabetes Addenbrooke's Hospital, Cambridge, UK

Aurelio Balsalobre, Ph.D. Molecular Biology IRCM, Montreal, Canada

Pao-Hsien Chu, MD Cardiology Chang Gung Memorial Hospital, Taipei, Taiwan R.O.C.

Sui Huang, MD, Ph.D. Oncology Institute for Systems Biology, Seattle, WA, USA

Henry I. Miller, MS, MD Health Policy / Regulation Hoover Institution, Stanford, CA, USA

Olivier Schaad, Ph.D. Genomics University of Geneva, Geneva, Switzerland

Adam Smith, D.Phil. Drug Discovery The Nobel Foundation, Sweden

Jeffrey P. Somers, JD Law Morse, Barnes-Brown & Pendleton, Waltham, MA, USA

Brian White-Guay, MD, FRCP (C) Clinical Development / Regulatory Affairs

University of Montreal, Montreal, Canada

Contact Information Phone: +1 514 849 8777 ext. 223 Fax: +1 514 849 6777

1000 Sherbrooke St. West, Suite 2120, Montreal QC H3A 3G4, Canada

www.sectoral.com

The Sectoral Asset Management Inc. newsletter is published quarterly by Sectoral Asset Management (“Sectoral”), Montreal, Canada. It is provided solely for purposes of evaluating Sectoral's advisory services. This newsletter is not an offer, recommendation or solicitation to buy or sell securities or units of any Fund. Any commentary within the report is for informational purposes only and is general in nature. This document contains certain statements that may be deemed forward-looking statements. They are based on certain assumptions, analyses of historical trends, current conditions, expected future developments and other factors. Certain information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Past performance is no guarantee of future results. Investing in healthcare companies involves a high degree of risk, and prices of these companies' stocks may be very volatile. Sectoral may hold securities of issuers referred to in this report in portfolios under management. You may request performance updates by emailing Jérôme Pfund at [email protected]. SECTORAL217

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