New Cancer Drugs: First Movers Will Win

Stefan Quenneville: We recently put out a report on immuno-oncology drugs, which represented a new way to treat cancer, which we think is going to really revolutionize the way the disease is going to be treated and, of course, have implications for the moats of companies in the pharmaceutical and biotech sector.

Immuno-oncology drugs work by basically harnessing the patient's own immune system to target their tumors. The results from these drugs have been remarkable, and it's really one of the rare cases where we might be seeing a paradigm shift in how a very serious disease is being treated. This, of course, has important implications for investors.

So, one of the key takeaways from our research is that the market for these drugs is larger than people currently appreciate. We see aggregate sales in 2022 of about $33 billion versus consensus of about $20 billion currently. This is driven by our expectations for very strong pricing, which is typical for oncology drugs, as well as the broad use of these drugs on a lot of different kinds of cancer.

The second point, which speaks to the implications for moats in the sector, is that we think the first movers, as well as the companies that are able to aggregate a portfolio of these different therapies that work well in combination, are really going to be the long-term winners. The way we currently see it now is that Bristol-Myers Squibb (BMY) is the best positioned and is currently the first mover in this space. They are followed closely by Merck (MRK). And we think, longer term, both Roche (ROG) and AstraZeneca (AZN) are also well positioned.

On the biotech side, we thing Insight has some attractive early-stage assets. Of the companies I just mentioned, Merck is currently the most undervalued. It is currently trading at about a 15% discount to our fair value estimate. It represents an attractive way to get exposure to the immuno-oncology space.