Companies With Meaningful Dependence On Oncology Drugs Business

We believe that immuno-oncology is going to be one of the key pillars of the next phase of pharma growth. Why do we think so? First, treating cancer is a tricky thing due to a large variety of types and sub-types that respond to very specific therapies. This alone implies that the overall potential is huge and improved survival rates can, to an extent, justify the high prices we expect for these drugs. Second, the recent growth observed in the sales of some of the newly approved immuno-oncology drugs corroborate our belief. So the natural question is — which companies are going to ride this wave? We believe the companies with high dependence on cancer therapeutics, especially those investing in immuno-oncology, are going to reap the benefit and get rewarded for the risk they have taken. Let’s take a look at which companies fall into this category in our coverage universe.

See our complete analysis for Bristol-Myers Squibb

Oncology Business Contribution To Roche’s Valuation: 60% 

Within our coverage universe, Roche (NASDAQ:RHHBY) is by far the strongest in cancer therapeutics. We estimate that approximately 60% of its valuation can be attributed to oncology segment and much of this is driven by it major biologics Rituxan/MabThera, Avastin and Herceptin. These drugs are used for treating blood cancer, breast cancer and colorectal cancer. Their combined revenues stood at more than $21 billion in 2014 accounting for more than 50% of Roche’s pharmaceutical sales.

While we expect Roche to defend these strong franchises by expanding into adjuvant and combination therapies, we also expect meaningful contribution from its R&D pipeline. Roche is focusing on extending usage of Perjeta, Kadcyla and Avastin for early, second line and adjuvant therapies in breast cancer, ovarian cancer and lung cancer. We believe Roche’s pipeline drugs can bring incremental annual revenues of $5-6 billion in the next several years.

Oncology Business Contribution To Bristol-Myers Squibb’s Valuation: 40% 

The strong contribution of oncology segment to Bristol-Myers Squibb (NYSE:BMY) can be pinned to the expected growth in its key cancer drugs Yervoy and Nivolumab (Opdivo). We expect their combined sales to jump from $1.3 billion in 2014 to almost $7.5 billion by 2022, fueled by widespread adoption of Nivolumab resulting from approvals for multiple conditions. These forecast imply cumulative revenue of around $35 billion from these drugs over a period of 8 years, accounting for almost a quarter of the expected total cumulative revenue for the company during the same period. Although Yervoy is facing the impact of growing competition, we expect the revenues to pick up, considering the combination regimen of Yervoy and Opdivo was approved by the FDA recently.

Opdivo, or Nivolumab, is an immuno-oncology drug. It was originally approved for melanoma, and was later approved for treating patients who have been previously administered treatment for metastatic squamous non-small cell lung cancer. The company is likely to get the FDA approval for non-squamous NSCLC (non-small cell lung cancer) soon, which could help it expand its market significantly. NSCLC constitutes roughly 85% of all lung cancers, according to cancer research institute. About 25% to 30% of NSCLC is squamous, with remaining being non-squamous.

Oncology Business Contribution To Pfizer’s Valuation: 15%

Cancer drugs generated a little over $2 billion for Pfizer (NYSE:PFE) in 2014, accounting for just 4% of its total revenues. However, the growth outlook is more promising than that. We expect Sutent, Xalkori and other cancer drugs to grow rapidly and reach more than $8.5 billion in annual sales by the end of our forecast period. A significant portion of this growth will come from Pfizer’s pipeline. Not only is the company focusing on developing patented drugs, it is also developing biosimilars (generic versions of biologics) in cancer therapeutics. Its recent acquisition of Hospira is going to strengthen this approach.

Oncology Business Contribution To Merck’s Valuation: 10%

Relatively low value contribution of cancer drugs for Merck (NYSE:MRK) stems from a couple of things. First, the company has relatively higher dependence on anti-infectives, metabolism drugs and legacy drugs. Second, it is relatively new to tap the growing immuno-oncology market. Its total cancer drug sales stood at less than $1 billion in 2014.

Merck’s immuno-oncology drug Keytruda is already approved for Melanoma in the U.S. It has also received the approval in the EU for the same specification. The drug is also currently under priority review from the FDA for non-small cell lung cancer (NSCLC). The FDA also recently approved a supplemental biologics license for the same drug for patients with advanced non-small cell lung cancer whose disease has progressed on or after platinum-containing chemotherapy. Keytruda can significantly expand its target market over the course of 12 months. Lung cancer is one of the most prevalent cancer types in the world, both in terms of incidence and mortality.

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