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By Matthew Coffina, CFA and Damien Conover, CFA | 04-29-2015 02:00 PM

4 Companies Leading the Next Wave of Cancer-Drug Innovation

First movers and firms that provide combination therapies represent the best investment opportunities in the immuno-oncology market, says Morningstar's Damien Conover.

Matt Coffina: For Morningstar StockInvestor, I'm Matt Coffina. I am joined today by Damien Conover, who is the director of our health-care team. We are going to talk about immuno-oncology drugs.

Damien, thanks for joining me.

Damien Conover: Matt, thanks for having me.

Coffina: So, immuno-oncology is a really hot topic in pharma right now. What exactly are these drugs?

Conover: What they do is they help the immune system recognize areas of problem. So, in cancer, what you see is the tumors evade the immune system, and what these drugs do is help the immune system find the cancer and try to destroy it.

Coffina: So, which companies are leading the development of immuno-oncology drugs, and do you see any investment opportunities?

Conover: This is an area where almost all the pharmaceutical firms are really interested in exploring, but there are definitely some leaders. I'd say at the front of the leadership pack is Bristol-Myers (BMY). Along with Bristol, there's Merck (MRK), Roche (RHHBY), and AstraZeneca (AZN) as well. So, those are the four names that we see as really leading this next wave of innovation in immuno-oncology.

Coffina: Of those four, Bristol is the most concentrated on immuno-oncology as well, right?

Conover: Yeah. If you look at Bristol's pipeline, it's almost exclusively focused on immuno-oncology. They have some other assets there, and they obviously have a lot of products they sell currently that aren't in immuno-oncology, but the purest play in immuno-oncology is definitely Bristol.

Coffina: Do you feel like investors appreciate this opportunity? Is it already fully baked into stock prices?

Conover: This is an important question because I think the investment community understands this is an important opportunity, but the magnitude of the importance, I think, is underappreciated. By 2022, we're estimating the immuno-oncology franchise to generate about $33 billion in annual sales; that's relative to [Wall Street] consensus expectations of $20 billion. So, there is a big delta there between where we're seeing the opportunity versus consensus. And keep in mind that these are very-high-margin products, so there is going to be an amplified impact on the bottom line for these firms.

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