The drive to develop cancer drugs that harness the immune system looks like the next big thing for Bristol-Myers, Merck and Roche

THURSDAY, MAY 30, 2013

Invest for the Cure

By JOHANNA BENNETT | MORE ARTICLES BY AUTHOR

The drive to develop cancer drugs that harness the immune system looks like the next big thing for Bristol-Myers, Merck and Roche.

Scientists have been laboring for years to develop treatments that harness the body’s immune system to destroy cancer. All that effort may finally be about to pay off for patients and drug makers, not to mention investors. The race to develop so-called immunotherapies takes center stage at this year’s meeting of the American Society of Clinical Oncology, which begins May 31 in Chicago. Preliminary data from early-stage studies unveiled ahead of the conference have fueled convictions that these drugs are the new front in the war on cancer. It has also fueled stock prices.

Three companies – Bristol-Myers Squibb (ticker: BMY), Roche Holding (RHHBY) and Merck & Co. (MRK) – have experimental treatments in their pipelines that could deliver billions in annual sales over the next decade. Up 43% since Dec. 31, Bristol has the biggest and perhaps the most lucrative pipeline. But at almost 26 times 2013 earnings, shares reflect much of that excitement. Merck, meanwhile, has lagged, climbing just 14% so far this year, and presents perhaps the best opportunity for investors.

The potential market for immunotherapies is enormous. Though the most promising therapies won’t hit the U.S. for a few years, it could become the biggest drug class in history, with annual sales as high as $35 billion by 2023, according to Citigroup analyst Andrew Baum.

“This will be the dominant dynamic in the pharmaceutical industry for the next five years,” says Baum. “These therapies stand to change perceptions and expectations for patients and drug makers.”

Responsible for killing roughly eight million people each year, cancer is one of the leading causes of death worldwide. No other disease generates as much drug revenue. Totaling $61.6 billion in 2012, sales of oncology medications exceeded those of HIV and cholesterol-lowering drugs combined, according to market researcher IMS Health.

Cancer, however, is a diverse disease and can be difficult to treat. Existing drugs have potentially dangerous side effects. And while conventional chemotherapy and other drugs can have a powerful effect shrinking tumors, the benefits are often short lived.

Immunotherapies essentially reset the immune system to attack cancer cells, holding the promise for long-lasting remissions and treatments that work against many types of cancer.

Drug makers are working on a variety of immune-boosting agents —vaccines, gene therapy and T-cell antagonists. Particularly high hopes surround drugs called checkpoint inhibitors, which block proteins used by tumors to hide from the immune system. Citigroup’s Baum estimates that these compounds could account for more than half of immunotherapy sales.

At a Glance

Bristol-Myers Squibb (BMY)

 

Stock Price:	$47.02
52-Week High:	$48.83
52-Week Low:	$30.64
Market Value:	$77.2 billion
Est. 2013 EPS:	$1.81
2013 P/E:	25.9
Est. Long-Term EPS Growth:*	10%
Est. (2013/2012) EPS Growth:	-9%
Revenue (trailing 12 months):	$16.2 billion
Dividend Yield:	3%
CEO:	Lamberto Andreotti
Headquarters:	New York, N.Y.

*Based on analyst estimates looking ahead three to five years.
Sources: Thomson Reuters and Yahoo! Finance

Bristol-Myers is leading the charge on checkpoint inhibitors, a fact some analysts say is already reflected in the stock. Bristol has one checkpoint inhibitor on the market already. Approved by the Food and Drug Administration in 2011 as a treatment for melanoma, Yervoy is expected to generate sales of $2.5 billion by 2020, according to Leerink Swann analyst Seamus Fernandez.

A newer drug, nivolumab, is in five late-stage studies, and is being tested in combinations with Yervoy. It targets the PD-1 protein. If all goes well, it could hit the U.S. market in 2015.

Bristol, meanwhile, has six other compounds in its pipeline. Citigroup’s Baum sees $11 billion in sales from immunotherapies by 2023, with $7 billion alone coming from nivolumab.

Baum also sees more upside. He expects the stock to climb 17%, to $55, in the next 12 months, or 30 times 2013 earnings.

At a Glance

Merck & Co. (MRK)

 

Stock Price:	$47.08
52-Week High:	$48.79
52-Week Low:	$37.02
Market Value:	$142.2 billion
Est. 2013 EPS:	$3.50
2013 P/E:	13.4
Est. Long-Term EPS Growth:*	3.50%
Est. (2013/2012) EPS Growth:	-8%
Revenue (trailing 12 months):	$46.2  billion
Dividend Yield:	3.60%
CEO:	Kenneth C. Frazier
Headquarters:	Whitehouse Station, N.J.

*Based on analyst estimates looking ahead three to five years.
Sources: Thomson Reuters and Yahoo! Finance

Merck is not as far along in its drug development efforts, so, at 13.4 times 2013 earnings, it’s a far cheaper way to play the immunotherapy market. Merck’s potential blockbuster is lambrolizumab, which, like Bristol’s nivolumab, works by blocking the PD-1 protein. The drug received “breakthrough” designation from the FDA, which could speed its path through the agency. But analysts say it lags nivolumab by 12 months to two years.

Meanwhile, Citigroup’s Baum forecasts $3 billion in sales by 2023.

But little excitement is worked into Merck’s stock price, says Charles Butler, an analyst with Barclays Capital, who sees the stock climbing 27% to hit $60 a share in the next 12 months, or 17 times 2013 earnings.

“Very little of the long-term potential is reflected in Merck’s stock price,” Butler says. “To be fair, Bristol-Myers is a smaller company so the potential sales from these drugs could have a bigger impact, but Merck’s stock price reflects only 5%, if that.”

At a Glance

Roche Holding (RHHBY)

 

Stock Price:	$63.73
52-Week High:	$66.52
52-Week Low:	$38.63
Market Value:	$216.4 billion
Est. 2013 EPS:	$3.86
2013 P/E:	16.5
Est. Long-Term EPS Growth:*	7.40%
Est. (2013/2012) EPS Growth:	18.70%
Revenue (trailing 12 months):	$50.8 billion
Dividend Yield:	3%
CEO:	Dr. Severin Schwan
Headquarters:	Basel, Switzerland

*Based on analyst estimates looking ahead three to five years.
Sources: Thomson Reuters and Yahoo! Finance

Roche also lags Bristol in the race to get a checkpoint inhibitor on the market. Known as MPDL3280A, Roche’s entry in the immunotherapy race takes a different approach, blocking a molecule known as PD-L1. As the maker of the blockbuster cancer drugs Avastin and Herceptin, Roche is a giant in the oncology market. And it has a considerable research and development budget.

Regulatory approval is expected by 2017. And by 2023, Citigroup’s Baum sees Roche’s share of immunotherapy drug sales reaching $7 billion.

At almost $64, U.S.-listed shares of Roche trade at roughly 16.5 times 2013 earnings. Over the next 12 months, Wall Street sees the American depositary receipts climbing 7% to $68.

To be sure, it’s early days yet for the immunotherapy market.  The pharmaceutical industry is littered with the corpses of drugs that failed to live up to their early promise or fell victim to newer, more potent rivals. And analysts caution that commercial success will hinge on drugs getting used in combinations and against a broad range of cancers.

All three drug makers reward patient investors with yields of 3% or more.

While caution is warranted, says Dr. Jeffrey Schneider, director of thoracic oncology at Winthrop University Hospital in Mineola, N.Y., “We are at a better point now than we’ve ever been in the past.”