Medical science hasn’t yet won the war on cancer, but it is scoring important victories in battles against many forms of the dreaded disease. Advances in new treatments have made cancer a hot investing theme over the past 18 months, helping to power fresh interest in biotechnology stocks.
SPECIAL REPORT: Fighting Cancer
Companies such as Medivation have fueled the renewed lure of striking it rich from novel cancer treatments. With Xtandi—its breakthrough treatment for prostate cancer—riding high, plus promising new drugs for breast cancer and blood cancers in development, the company was the object of a bidding war in 2016. It culminated last September with drug giant Pfizer (symbol PFE) paying $14 billion for Medivation, or $81.50 per share—38 times the stock’s level at its 2010 low.
In February, Japan’s Takeda Pharmaceuticals (TKPYY) paid $5.2 billion for Ariad Pharmaceuticals (ARIA), which is developing drugs that target certain solid tumors. The buyout price was 75% above Ariad’s market value before the deal was announced.
Plenty of volatility. Biotech shares had led the bull market overall, with a New York Stock Exchange–sponsored index of 30 biotech issues soaring 723% from early 2009 to mid 2015. But the stocks then dived 42% by February 2016, in part because of a political backlash against high drug prices.
That backlash remains a long-term threat to the industry’s profit potential, and it continues to weigh on the stocks. Despite a rebound since early 2016, the NYSE biotech index is still down 20% from its 2015 peak. But that could also mean opportunity.
Investors surveying the cancer medicine field in 2017 can take one of two approaches. One is to own the companies that reign as the biggest names in oncology treatments, trusting that they can develop new blockbusters faster than their current stars fade, given inevitable competition and market saturation. This strategy is a bet on steady growth (and, in some cases, regular and steadily rising dividends) rather than on moonshots.
The higher-risk route is to invest in relatively new companies focused on cancer niches that could pay off exponentially if a new treatment succeeds—as Medivation’s Xtandi did—or result in massive losses if a treatment fails.
At the top of the list of the oncology giants is Switzerland’s Roche Holding (RHHBY, $32). Thanks to its 2009 acquisition of biotech pioneer Genentech, Roche controls three of the world’s top cancer drugs by sales: Avastin, for colon and lung cancers; Rituxan, for blood cancers; and Herceptin, for breast cancers. (Share prices and related data are as of March 31.)
All three drugs, known as monoclonal antibodies, were among the first wave of blockbusters developed as part of research into immunotherapy—that is, harnessing the power of the body’s natural immune system to fight cancer. Some antibodies are molecules engineered to help the immune system recognize camouflaged cancer cells and destroy them. Other antibodies either kill malignant cells directly or halt their growth. Although immunotherapy can have side effects, it’s a huge step up from chemotherapy, which can destroy healthy cells along with cancer cells.
All told, more than 60% of Roche’s sales are cancer-related. In 2016, total revenue reached a record $51 billion. But Roche’s spending on research is also enormous, and that has weighed on profit growth: Earnings in 2016 were only slightly above 2012 levels. And Roche’s stock is 17% below its all-time high, reached in 2015.
One key investor concern is that Roche’s patents on Avastin expire in 2019 in the U.S. and in 2022 in the European Union, opening the door to lower-cost copycats. Herceptin, first approved in the U.S. in 1998, may also face imitators soon.
Bulls say Roche’s stock, which sells for a reasonable 17 times estimated year-ahead earnings, doesn’t adequately reflect the potential in new immunotherapies. The company has about 90 experimental cancer treatments in its research pipeline. (Roche trades in the U.S. as American depositary receipts.) In March, Roche said a study showed improved survival rates in post-surgery breast cancer patients using Perjeta, a drug first approved in 2012, along with Herceptin. Analysts at JPMorgan Chase’s brokerage unit say the Perjeta study, along with clinical-trial data expected this year on Roche’s new antibody Tecentriq, for lung cancer, should drive the stock higher in 2017 as investor confidence rises.
AbbVie (ABBV, $65) is another large player in cancer treatment that fans say is underappreciated. The firm is best known for its antibody Humira, which suppresses debilitating inflammation illnesses, including rheumatoid arthritis, Crohn’s disease and psoriasis. Humira made up 63% of AbbVie’s sales of $25.6 billion in 2016.
The stock has languished since mid 2015, partly because of investor fears that new competition will eventually dent Humira sales, and it now trades for a modest 12 times estimated 2017 earnings. To bolster its growth outlook, AbbVie in 2015 bought biotech firm Pharmacyclics, which developed the blood-cancer treatment Imbruvica in partnership with Johnson & Johnson (JNJ). So AbbVie shares Imbruvica’s sales with J&J. “Looking ahead, AbbVie’s pipeline is weighted heavily toward new cancer drugs,” says research firm Morningstar. “In particular, AbbVie’s pipeline should lead to an increasingly strong position in blood cancer,” anchored by Imbruvica.
Brokerage William Blair agrees. “We believe the strength of AbbVie’s pipeline is not being fully recognized” by investors, Blair says. Among the potential hits: Rova-T, a drug that shows promise in killing particularly aggressive lung tumors.
Like Roche and AbbVie, Celgene (CELG, $124) is an established—and profitable—developer of drugs to battle cancer and other diseases. From 2012 to 2016, annual revenues doubled, to $11.2 billion. Celgene’s lead drug, Revlimid, fights multiple myeloma—a cancer of specialized bone-marrow cells that are critical for killing infections. In clinical trials, Revlimid was shown to destroy the rogue cells or prevent them from growing. Approved in the U.S. in 2005, the drug has become a global star: Sales reached $7 billion in 2016, or 62% of Celgene’s total.
Revlimid won’t face generic competition until 2022. In the meantime, brokerage UBS says, investors are underestimating prospects for improved Revlimid sales, including from expanded use in Europe and in extended patient treatment periods in the U.S. The company’s outlook is also bolstered by Otezla, its three-year-old psoriasis drug, and by potential cancer treatments in its research pipeline.
All in all, “Celgene offers the cleanest, least-complicated growth story across larger-capitalization biotech” for the next few years, UBS says. It estimates that Celgene will earn $8.6 billion in 2019, or $10.75 per share, up 81% from $5.94 in 2016.
If you’re willing to take on more risk for a shot at a big long-term payoff, consider Kite Pharma (KITE, $78), which went public in 2014. Kite is developing “CAR-T” technology, short for chimeric antigen receptor T-cell therapy. It’s a new way to get immune-system cells to target and destroy specific cancers.
Here’s how it works: T cells, a type of white blood cells, are collected from a patient’s blood and genetically altered to place certain antigen receptors (proteins) on their surfaces. The T cells are then multiplied in the lab and reinjected into the patient’s blood, where they will attach to specific proteins on the surface of cancer cells.
In February, Kite reported favorable results for the therapy in trials with patients suffering from non-Hodgkin’s lymphoma, a blood cancer. The data caused brokerage Goldman Sachs to boost its probability of success for the drug from 75% to 90%—and triggered a surge in the stock, lifting its market value today to $4.3 billion.
Kite, which has no sales or earnings, is enormously risky. The attraction, Morningstar says, is that CAR-T therapy “is game-changing technology.”
Another highly speculative investment idea in the war on cancer is Foundation Medicine (FMI, $32). The seven-year-old company isn’t a drug developer but rather performs tests on patients’ cancer tissues and provides their doctors with genetic data—both about the individual patient and more broadly about the specific cancer. The idea is that the information can help doctors suggest the best therapies for patients. The data can also help drugmakers design new cancer treatments.
Over the long term, Foundation envisions being a central clearinghouse for cancer data that can be used by doctors, drug researchers, cancer-care centers and others. Foundation had $117 million in revenues last year, up 26% from 2015. But the firm remains deep in the red as it spends to build its business. It lost $113 million, or $3.25 per share, in 2016.
A major hurdle for the company is persuading insurance companies to cover the cost of the tests, which can exceed $7,000. While Foundation fights that battle, it at least has the biggest name in cancer drugs on its side: Roche bought a controlling stake in the company in 2015 and owns 61%.
Targeting the killer cancers
Here are the four deadliest cancers in the U.S., some of the biggest drugmakers seeking cures and some next-generation treatment possibilities.
Lung cancer (155,870 deaths expected in the U.S. in 2017; 52 drugs approved). U.S. regulators in 2015 added two new drugs—Keytruda, from Merck (symbol MRK), and Opdivo, from Bristol-Myers Squibb (BMY)—to the arsenal fighting the most common type of lung cancer, known as non-small-cell cancer.
Colorectal cancer (50,260 deaths; 24 drugs). Avastin, from Roche (RHHBY), Erbitux, from Eli Lilly (LLY), and Stivarga, from Bayer, are common treatments.
Pancreatic cancer (43,090 deaths; 17 drugs). This cancer is usually diagnosed too late, so it’s almost always fatal. Roche’s Tarceva is one treatment, but the Cancer Research Institute cites a “great need for more-powerful treatments.”
Breast cancer (41,070 deaths; 65 drugs). Lynparza, from AstraZeneca (AZN), now used to treat ovarian cancer, shows promise in boosting survival rates for some breast cancers.
Source: National Cancer Institute
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