The market for pharmaceutical products around the globe is enormous.
According to the IMS Institute for Healthcare Informatics, total spending on drugs was projected to hit $1.06 trillion in 2014, a 7% increase from 2013 levels. Furthermore, pharmaceutical sales are expected to rise nearly a quarter more to $1.3 trillion by 2018 due to the emergence of breakthrough therapies.
To add some level of context to these figures, global pharmaceutical sales in 2014 were higher than the gross domestic product of 172 out of 187 nations listed by the International Monetary Fund in 2014.
There are a number of reasons for this surge in pharmaceutical sales, including a ramp up in new breakthrough therapies, a flurry of targeted therapies hitting the market, and finally, the need of pharmaceutical companies to boost prices in developed counties to subsidize their expansion into emerging and underdeveloped markets that simply can't afford U.S. or EU pricing.
Cancer drugs drive pharmaceutical sales growth
The IMS Institute for Healthcare Informatics suggests that cancer drugs will be one of the greatest drivers of pharmaceutical sales growth, soon touching $100 billion (if not more) in annual sales.
We certainly don't have to look far to see how breakthrough and targeted drugs are changing the landscape of cancer treatments. Merck's (NYSE:MRK) Keytruda and Bristol-Myers Squibb's (NYSE:BMY) Opdivo are two revolutionary PD-1 inhibitors designed to work with a patient's immune system to enhance its cancer fighting potential. Both are currently approved to fight advanced cases of melanoma. Keytruda comes with a $150,000 annual price tag, while Opdivo is right behind at $143,000 per year.
Few investable cancer pure plays exist
Unfortunately, the success rate of developing cancer drugs is pretty low. For this reason, most pharmaceutical and biotech companies tend to diversify their pipelines beyond just cancer drugs, making it tough to find an intriguing cancer pure play stock.
For example, Roche (NASDAQOTH:RHHBY) boasts a pipeline that currently has more than 100 clinical studies ongoing, ranging from phase 1 to registration and awaiting a ruling. Of its clinical studies, 71 of its ongoing trials are in the oncology field. There is perhaps no deeper cancer drug pipeline than Roche's -- but it's ultimately not an investment pure play in cancer drugs, because it's also researching autoimmune, ophthalmic, and infectious diseases, to name a few other therapeutic areas of interest.
Many smaller biotech stocks offer that investment pure play potential in cancer drugs, but they also come with significant risk if even a single trial doesn't work in their favor. The reason for this is many smaller biotech companies don't have a drug development platform, partnership capabilities, or the money to develop a deep pipeline of products. So there is often the risk that if one drug fails in clinical studies a small-cap biotech stock will be clobbered.
This situation played out with personal holding Exelixis (NASDAQ:EXEL) last year after Cometriq failed to provide a statistically significant improvement in median overall survival in a COMET-1 study for patients with metastatic castration-resistant prostate cancer. Cometriq had previously been approved to treat a rare but aggressive type of thyroid cancer, but its failure in a trial that targeted the second most diagnosed cancer each year wound up temporarily shaving more than 50% off Exelixis' share price.
The best investment pure play in cancer drugs
If you're looking for the best investment pure play in cancer drugs, I'd say your research should begin and possibly end with ImmunoGen (NASDAQ:IMGN).
Although ImmunoGen is currently unprofitable, there are a number of reasons to be excited about this cancer pure play.
For starters, ImmunoGen has a unique pathway to attack cancer. Traditional chemotherapy attacks cells indiscriminately, killing both healthy and cancerous cells. ImmunoGen's solution to this is the antibody-drug conjugate. ImmunoGen is utilizing antibodies to seek out specific cancer cells and using its linking technology to piggyback a toxin (chemotherapy agent) onto the antibody. Once the antibody seeks out and binds to the targeted cancer cell, this toxin is released, delivering a targeted dose at the tumor and hopefully sparing your body from healthy cell death.
Secondly, because its drug development platform is relatively unique -- there are only a handful of ADC drug developers -- ImmunoGen is able to monetize its platform and pipeline with ease. Forging collaborations or licensing its products gives ImmunoGen upfront and potential milestone cash that it can use to fund the development of in-house cancer therapies and run day-to-day operations without having to seek a dilutive common stock offering, as is common among small-cap biotech stocks.
Recently, ImmunoGen announced a deal with TPG Special Situations Partners that nets it $200 million in cash ($194 million after taxes) in exchange for 100% of its Kadcyla royalty revenue stream. Once collaboration partner Roche has made $235 million to $260 million in payments to TPG SSP (depending on timing), ImmunoGen can reclaim an 85% share of its royalties. The move supplies ImmunoGen with a hefty sum of anti-dilutive cash, and it proves how easily the company can monetize its platform and products.
Lastly, ImmunoGen's pipeline is extremely large for a small-cap biotech focused strictly in one therapeutic field. Excluding its only FDA-approved drug for second-line HER2-positive metastatic breast cancer, ImmunoGen has 13 compounds currently in clinical testing and 26 total clinical and preclinical trials in its pipeline. Three of these clinical compounds are in-house, wholly owned products, while a majority are partnered products, which can mean cost-sharing and milestone revenue potential.
You should still keep this in mind
Even if ImmunoGen really is the best pure play in cancer drugs, as I suggest, it's important you understand that it doesn't come without risks.
Obviously having 26 ongoing preclinical and clinical studies gives the company some wiggle room to fail a bit and not get hammered by investors. However, you should keep in mind that ImmunoGen's in-house drugs pack a much higher margin punch than its collaborative drugs, which often have much lower royalty percentages. Thus, if any of ImmunoGen's in-house products fail, it's going to sting.
Additionally, because ImmunoGen's royalties are set up in such a way that it needs a few of its pipeline drugs to be approved in order to be successful, and most of its pipeline is still early stage, it could be 2018 or beyond before it's finally profitable on a recurring basis. As an investor, this means you should take the potential for ongoing losses into account when valuing this company.
Still, with unparalleled diversity and more than two dozen opportunities to knock one out of the park, I believe ImmunoGen offers high growth seekers the best investment pure play in cancer drugs.
Sean Williams owns shares of Exelixis, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends Exelixis and ImmunoGen. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.