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4 Companies Leading the Next Wave of Cancer-Drug Innovation

Matthew Coffina, CFA
Damien Conover, CFA

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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Coffina: So, why are first-mover advantages so important, not just in immuno-oncology but really any cancer drugs?

Conover: It's important to be first for several reasons: One, you get the oncologists familiar with the drug, so they will start to prescribe that drug. If another drug comes along, it's unlikely for them to switch. In oncology, there is less incentive to switch for pricing, so oncologists tend to get used to a drug and use it a lot.

A second point--and this is really important--when you think about clinical development, if you are the next-generation oncology product, you need to have a lot of clinical data behind your drug before physicians get used to it and get comfortable enough with it to start prescribing it. So, you will start to see survival data, but if you are the first-mover, you're going to have a long period of survival data. For the next-generation drug, you're going to need a lot more time to start to catch up to show a reasonable amount of survival benefit for the next-generation oncology drug.

Coffina: We've also talked about how the later generations of drugs have to compare themselves against the earlier ones. Why is that an issue?

Conover: Well, that's important because what you'll start to see is physicians get comfortable with that first-line treatment, and if they want to try something else before the drug they are used to, they are going to want to see that comparability data. So, if you're the next-generation drug, no longer can you show the drug relative to placebo or some drug that doesn't work as well. You have to show it relative to these immuno-oncology drugs that potentially work significantly well.

Coffina: In the long run, you expect combination therapies to really be the main drivers of the immuno-oncology market. What are the opportunities here, and which firms are best positioned?

Conover: This is important. As we see oncology treatment today, immuno-oncology drugs are making a major step forward versus some of the old chemotherapy drugs; but still there's a lot of room for further improvement. And so, what we'll likely see is the immuno-oncology products beings partnered with some of the old chemos and some of the targeted cancer drugs right now.

But going forward, I think we'll see more immuno-oncology drugs partnered with immuno-oncology drugs, so you get the immune system really doing a lot of the heavy lifting in getting the body's cancer out of the system. I think the firms that are best positioned for combination therapy are, again, Bristol--very well positioned--after that Roche and AstraZeneca are very well positioned. Merck is well in the lead with immuno-oncology but doesn't have quite as many combinations as those other three companies have.

Coffina: Great. Thanks for joining me, Damien.

Conover: Matt, thanks for having me.

Coffina: So, in conclusion, we think immuno-oncology is a particularly promising area for growth for pharmaceutical firms and that Bristol-Myers and Merck look like some of the best investment opportunities. AstraZeneca and Roche are also toward the forefront of developing these drugs. For Morningstar StockInvestor, I'm Matt Coffina. Thanks for joining us.

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