Sadly, cancer is the second leading cause of death in the U.S., behind heart disease. Worldwide, approximately 12.7 million people will be diagnosed with cancer this year, and roughly 7.6 million people will die from the disease. The global burden of cancer continues to increase largely due to the aging population, the growth of the world population, and an increase of a cancer-causing lifestyle, such as smoking, especially in economically developing countries. Today, more people die from cancer than from AIDS, malaria, and tuberculosis combined. The World Health Organization projects the global number of deaths from cancer will increase nearly 80% by 2030, with most occurring in low and middle-income countries.
Due to the lack of products that can safely treat cancer, pharmaceutical manufacturers have enjoyed high profits from drugs that fight the disease; and according to Trefis.com, pricing of cancer drugs has not yet met its ceiling. This means higher prices and higher profits for investors. Because of the lack of safe cancer treatments, cancer companies, large and small, are working diligently to produce the next blockbuster cancer drug. Following are three pharmaceuticals that represent good investment potential for long-term positions. These companies are in various stages of drug development with mixed financials, differing levels of risk and mixed upside potential.
Roche Holdings (RHHBY.OB) based in Basel, Switzerland, with its pharmaceuticals subsidiaries Genentech in the U.S. and Chugai in Japan, is the largest manufacturer of cancer-fighting drugs, and has the highest market share in the global oncology market. Roche had 5 of the top 10 selling cancer drugs of 2011 on the market, including its non-Hodgkin lymphoma drug, Rituxan/MabThera, with $3 billion in worldwide sales, Avastin, its colorectal cancer drug with $2.5 billion in sales, Herceptin, its Metastatic HER2 + breast cancer drug with sales of $1.66 billion, Xeloda, another colorectal cancer drug with $6.47 million in sales, and Tarceva, its lung cancer drug with $5.64 million in sales. Several of these drugs have found additional indications beyond the one cancer they were initially manufactured to fight, including 6 additional indications in the oncology segment relating to Avastin, Herceptin, Tarceva, and MabThera/Rituxan that Roche is planning to file for approval in 2012. The company has a pipeline of cancer-fighting drugs and expects results from 19 late-stage clinical trials over the next 18 months.
Roche has seen a few setbacks recently. Its promising cardiovascular drug, dalcetrapib, was discontinued after it failed in its Phase III trials to significantly boost good (HDL) cholesterol. Its third best-selling drug, Herceptin, which treats 25-30% of breast cancer patients who have tumors that generate HER-2 positive proteins, has come under fire because of results of two conflicting studies examining how long patients should use the drug. The studies, one conducted by Roche called HERA, looked at the benefits of using Herceptin over 2 years as opposed to the standard 1 year. The second, an opposing French study called PHARE, is looking at whether patients receive the same benefit from using Herceptin for only 6 months as opposed to a full year. If the French PHARE study shows that there are no real benefits to using the drug beyond 6 months (and given the fact that the austerity-hit European healthcare systems are cutting back the use of the drug substantially, according to Kepler Capital Markets analyst, Fabian Wenner), PHARE has the potential to wipe $1.5 billion off Herceptin's revenue in the medium-term, and could send the stock down some 5-10%. Mr. Wenner added that Herceptin's adverse side effects on the heart could also hinder against longer use.
To add to Roche's setbacks, the European Medicines Agency (EMA) says it has started an "infringement procedure" to probe allegations that Roche dragged its feet on reporting some 80,000 adverse-event reports including potential side effects on a number of its drugs, which happen to be some of its top sellers: Avastin, Tarceva, Herceptin, and Tamiflu, along with the anti-HIV drugs Viracept and Invirase. If the EMA finds that Roche fell short of its obligations, the company could be fined by the European Commission up to 5 % of its annual sales in Europe.
Roche, with a market cap of $167.58 billion, is down slightly over the past few days of trading, and is currently at $48.74 per share, just shy of its 52-week high of $50.82. Its PE ratio of 18.33 is just slightly above the major drug manufacturer's sector average of 17.2, while its dividend yield of $3.78 is just slightly above its sector average of $3.68. Surprisingly Roche has felt little effect with a rash of negative news that has recently come out and with the market sell-off over the past few trading days. Perhaps mitigating the negative news is that the company beat analyst estimates by reporting a 15% increase in third-quarter sales. The company is still a solid company with a good dividend; however, given the current problems and the high stock price, this company looks like a good "hold" and perhaps a "buy" on the dips.
Galena Biopharma (GALE), a $135.7 million market cap company based in Lake Oswego, OR, has seen its stock rise over 300% YTD, mostly due to the positive news on its breast cancer drug, NeuVax; and according to new analysts' reports, the upward trend should continue. Analysts at MLV Capital initiated coverage recently, and set a "buy" rating and a $6.00 price target on the stock. McNicoll Lewis Vlak initiated coverage with a 1-year target price of $6.00 per share based on NeuVax's ongoing Phase III trial, and the belief that the drug will be able to prolong the lives of breast cancer patients who had their disease caught at an early stage. Separately, analysts at Cantor Fitzgerald reiterated a "buy" rating in a research note to investors on Wednesday, with a $4.00 target price for the stock.
The reason the analysts are giving positive ratings to Galena is that NeuVax has entered a Food and Drug Administration (FDA) Special Protocol Assessment for its Phase III clinical trials in an adjuvant setting with women with HER2 that are not eligible for Roche's Herceptin. That is important because Herceptin is given to HER2-positive breast cancer patients, which only account for 25% of patients. NeuVax, if found effective, will address the remaining 75%: the patients who are HER2-negative. NeuVax is an E75 peptide derived from HER2 combined with the immune adjuvant granulocyte macrophage colony stimulating factor (GM-CSF). In layman's terms, HER2 promotes the growth of breast cancer cells. T cells are a type of white blood cell that help fight off harmful substances in the body, like cancer cells. NeuVax stimulates the CD8+ T cells to target cells that show any level of HER2. Consider the fact that Herceptin sales are, as noted earlier, $1.66 billion annually. It is possible that if NeuVax, which has the potential of treating 50% more patients than Herceptin, can indeed treat low to intermediate HER2-negative patients, it too may be at least as financially successful as Herceptin. Earlier this year Galena received its U.S. patent for NeuVax, removing concerns of another company replicating its technology. Thus, the company will have a number of years to benefit from the low-cost, high-profit drug.
Galena also has another drug in preclinical trials, Folate Binding Protein-E39 (FBP), that began enrollment in February of this year for a Phase I/II trial to target ovarian and endometrial cancers. Ovarian cancer occurs in over 22,000 patients per year in the U.S., and due to the lack of specific symptoms, the majority of ovarian cancer patients are diagnosed at later stages of the disease; thus, it is the most lethal gynecologic cancer. Though ovarian cancer is not as prevalent as breast cancer, the number of patients that die from ovarian cancer is nearly 50% that of breast cancer patients.
Galena, with its stock trading around $2.15 per share, continues to add clinical operation sites in Europe and Asia. President and CEO, Mark Ahn, plans to add more staff (for a total of 50), which would make it a decent-sized biotechnology company. Mr. Ahn commented on the size of biotech and how smaller companies are making giant strides: "Where once drug research was limited to the larger firms, now most innovations are coming from small companies such as Galena." Though Galena shows no profits as of yet, this company should be valued (as many development-phase biopharmaceutical companies) on perceived future earnings based on news, good or bad. If NeuVax trials continue to show the drug is even moderately successful, it could prove to be a new powerhouse for Galena in the breast cancer drug market. Considering its size, Galena could be primed for a buyout by one of the major drug manufacturers who would profit from NeuVax in its portfolio. I see Galena Biopharma a "strong buy" at current levels.
Synta Pharmaceuticals (SNTA), a biopharmaceutical company with a market cap of $479 million, has also had positive analysts' coverage. The Jefferies Group, which has a "buy" rating on the stock, raised its target price from $15.00 to $22.00 in a research report sent to investors earlier this month. This occurred after the company announced its results from the interim analysis of the Phase IIb portion of the GALAXY trial, designed to evaluate the efficacy and safety of its lead Hsp90 inhibitor, ganetespib, as second-line treatment for advanced non-small cell lung cancer (NSCLC). The results indicated good tolerability for the combination of ganetespib (G) and docetaxel (D), as well as meaningful improvements in overall survival in adenocarcinoma patients receiving docetaxel plus ganetespib compared to those receiving docetaxel alone (the control). The Jefferies Group was encouraged that the overall survival data continued to show a strong favorable trend; the analyst commented, "We spoke at length with three GALAXY investigators who were bullish on the data and the safety profile. Although more maturity of data is needed for confirmation, we believe that strong ganetespib activity has been demonstrated and would be buyers of the stock."
Synta develops drugs to extend the lives and enhance the quality of life for cancer patients. Synta's stock is up 140% over the past year, and almost 75% YTD. At $8.09, it is nearing its 52-week high of $9.85 after bouncing off its May lows of $3.53. Given the positive data from the Galaxy trial, and the coverage from the Jefferies Group, even if the stock does not reach the target price, there is still plenty of upside potential.
As noted earlier, pharmaceutical manufacturers have enjoyed premium-pricing from drugs that fight cancer due to the large unmet need in the healthcare sector. Many times, drugs that look promising in earlier phases disappoint in later phases as more time has passed and more patients are evaluated. That is why when a new cancer drug looks promising in later trials, analysts take note. However, caution is advised: biopharmaceutical stocks can be volatile, offer huge upside potential and corresponding downside risks. Presented are three diverse companies targeting one of man's biggest killers. The three presented companies offer good current-level entries for various levels of risk, income, clinical development and indications targeted. Interested investors are advised to perform additional research to ascertain which, if any, of these fit their investment criteria.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.