Why should you consider investing in cancer-fighting stocks? Probably for the same reason you would consider investing in any kind of stock: the potential to generate attractive, market-beating, long-term gains.
The IQVIA Institute for Human Data Science projects that spending on cancer therapies will soar to as much as $250 billion by 2023, up from $150 billion in 2018. This presents a significant opportunity for investors who buy the right stocks. But it's first important to understand the dynamics of the industry and what to look for in those potential investments.
DNA and a cancer cell with a lab in the background
Image source: Getty Images.
A diverse cancer-fighting industry
Cancer is a collection of more than 100 diseases, all of which involve the uncontrolled dividing of cells in the body. The cancer-fighting industry includes hundreds of companies, many of them taking very different approaches.
Some companies develop and market products that help prevent cancer in the first place. For example, the use of smoking cessation products can reduce the risk of developing lung cancer.
Others focus on diagnosing cancer, which often involves obtaining and analyzing tissue biopsies to determine if cancerous cells are present. An important new trend in this field is the use of liquid biopsies, simple blood tests that can detect the presence of DNA fragments that have broken off from cancerous cells.
The biggest focus, though, is on treating cancers. Some companies develop medical devices that are used in performing surgical procedures to remove tumors from patients or in treating cancer through radiation. Many others develop drugs that aim to kill those cells in situ -- more than 700 companies are currently evaluating cancer drugs in late-stage clinical studies.
For years, drugmakers primarily focused on developing chemotherapies (drugs that are toxic to living cells, including cancer cells). More recently, though, there has been more attention placed on cancer immunotherapies, which stimulate the body's immune system to fight cancer.
Personalized medicine, which involves genetic testing of a patient to identify which treatment has the best odds of being the most effective, appears to have especially promising prospects. Many types of cancer are caused by specific genetic mutations -- alterations in the normal, healthy sequence of DNA in a gene. Pharmaceutical companies are developing drugs that target the types of cancer caused by some of those specific genetic mutations, and using companion diagnostic tests to identify the patients whose cancers have those mutations.
What to look for in cancer-fighting stocks
You'll want to evaluate the financial position of any company whose stock you're considering buying. Keep in mind, however, that when it comes to companies dedicated to fighting cancer, there are different things to look at depending on how far along their key products are in the development cycle.
Check out the sales growth for companies with products on the market already. Don't just focus on the company's cancer-fighting products, though. Big companies, in particular, often have products targeting multiple therapeutic categories.
The most important financial metric to examine for currently unprofitable companies is the cash position. This includes cash, cash equivalents (such as certificates of deposit and money market funds), and short-term investments that can be converted to cash within three to 12 months.
Companies can't remain unprofitable indefinitely without raising additional money to fund operations -- they'll have to either issue new shares or borrow more. The problem with issuing stock is that it causes shareholder dilution -- the value of each previously existing share decreases as it comes to represent a smaller fraction of the company. And borrowing increases interest expenses, which can limit how much money a company has available to invest in other important areas.
While not all cancer-fighting stocks pay dividends, some do. Find out the stock's dividend yield (the amount of dividend paid divided by the current share price). Higher dividends can dramatically boost the total return of a stock over the long run.
You'll want to research a stock's future growth prospects as well. Growth can be generated by current products and by-products in development. A pharmaceutical company refers to its drugs in development as its pipeline. The larger the pipeline, the less impact one failure will have on a company. The stocks of companies that have promising late-stage candidates will typically be less risky than those with only early-stage candidates.
It's also important to look at a stock's valuation. Earnings-based metrics such as price-to-earnings (P/E) and price-to-earnings-to-growth (PEG) ratios are frequently used by investors in comparing a stock's valuation against those of other stocks in the same industry. For pharmaceutical stocks, the industry average P/E ratio based on projected one-year earnings as of January 2019 was around 27 with an average PEG ratio of 2.8. The average P/E ratio based on projected one-year earnings for healthcare products stocks, including those of companies that make medical devices and diagnostics, was around 68. The average PEG ratio for health products stocks was 2.78.
5 top cancer-fighting stocks to buy now
Company
Key Area of Focus
AbbVie(NYSE: ABBV)
Blood cancer drugs
Bristol-Myers Squibb(NYSE: BMY)
Cancer immunotherapies
Guardant Health(NASDAQ: GH)
Cancer diagnostics tests
Illumina(NASDAQ: ILMN)
Gene sequencing
Intuitive Surgical(NASDAQ: ISRG)
Robotic surgical systems
AbbVie
Market researcher EvaluatePharma predicts that AbbVie's blood cancer drug Imbruvica will be the No. 5 best-selling drug in the world by 2024 with annual sales of $9.5 billion -- more than twice what the drug made in 2018. AbbVie makes around 57% of total Imbruvica sales with the remainder going to its partner, Johnson & Johnson.
AbbVie also markets another up-and-coming blood cancer drug, Venclexta, along with its partner, Roche. Analysts predict between $2 billion and $2.75 billion in peak sales for the drug.
But while AbbVie's oncology franchise is picking up momentum, the company's top-selling immunology drug, Humira, has begun to weigh on overall sales growth. Humira faces competition in Europe from biosimilars, which are clinically similar to previously approved biologic drugs that are made from living organisms.
AbbVie should still deliver solid growth over the long run, though, thanks to several other drugs that should be blockbusters in the not-too-distant future. Orilissa has already won approval from the U.S. Food and Drug Administration (FDA) as a treatment for managing endometriosis pain. AbbVie also hopes to secure FDA approval for the drug in treating uterine fibroids.
New immunology drugs Skyrizi and upadacitinib hold the potential to pick up the baton from Humira in immunology. EvaluatePharma ranked both of these drugs in its list of the top five new drug launches of 2019.
AbbVie also thinks that its pending acquisition of Allergan will boost its long-term sales growth. Assuming the transaction closes as planned, it will notably bring blockbuster products Botox and Juvederm along with promising antipsychotic drug Vraylar to AbbVie's lineup.
Another plus for AbbVie is its dividend. AbbVie is a Dividend Aristocrat, one of a small and elite group of S&P 500 stocks that have increased their dividends for at least 25 consecutive years. Its dividend yield throughout most of the company's history since being spun off from Abbott Labs in 2013 ranged between 2.4% and 4%. However, the concerns about Humira have taken on a toll on AbbVie's share price, causing its dividend yield to rise above 5% and even top 6% at times. In addition to driving the dividend yield higher, AbbVie's lower share price has made the stock's valuation much lower than most other pharmaceutical stocks.
Bristol-Myers Squibb
EvaluatePharma projects that Bristol-Myers Squibb's cancer immunotherapy Opdivo will be the world's fourth-best-selling drug of the future with sales increasing from $7.6 billion in 2018 to $11.3 billion by 2024. Opdivo is joined in BMS' lineup by another blockbuster immunotherapy, Yervoy. In addition, the company's leukemia chemotherapy Sprycel continues to deliver solid sales growth.
BMS plans to acquire Celgene in a deal that will give it blood cancer drug Revlimid, the No. 2 best-selling drug in the world in 2018 and in 2017. Celgene also has another blockbuster cancer drug in its lineup with Abraxane.
The acquisition of Celgene will add several cancer drugs with tremendous potential to BMS' lineup, including bb2121 and liso-cel. In addition, Celgene's pipeline features several other candidates that could become blockbusters in the future such as multiple sclerosis drug ozanimod, myelofibrosis drug fedratinib, and blood disorder drug luspatercept.
BMS has some big winners outside of oncology of its own. Blood-thinner Eliquis, which BMS co-markets with Pfizer, is predicted to become the No. 3 best-selling drug in the world by 2024. Arthritis drug Orencia is a blockbuster with sustained solid sales growth.
Investors should like BMS' dividend yield, which has ranged between 2% and 3% for most of the last five years but has risen well above 3% at times. The stock's valuation also appears to be attractive, with shares trading at P/E and PEG ratios well below pharmaceutical industry averages.
Guardant Health
Guardant Health is pioneering the use of liquid biopsies that can detect cancer in individuals' blood. The company currently markets two liquid biopsy products for use in selecting therapies for patients with advanced cancer: Guardant360 and GuardantOMNI. In addition, Guardant Health launched its LUNAR blood test for the detection of early-stage cancer and recurrence of cancer in early 2019 for use by researchers. These products have helped drive revenue growth of 120% for the company.
Because Guardant Health isn't profitable yet, it's important to note the company's cash position. As of March 31, 2019, Guardant Health had cash, cash equivalents, and marketable securities totaling $492.8 million. However, in May 2019 the company issued 4.5 million new shares in an offering that raised gross proceeds of $319.5 million. Guardant Health should be in a good position to fund operations for several years with its cash stockpile.
The stock is priced at a premium, though. Investors have driven the company's market cap (the total value of a company obtained by multiplying its stock price by the number of outstanding shares) to more than $7.5 billion based primarily on its promising growth prospects. Guardant Health estimates that the addressable U.S. market for its Guardant360 and GuardantOMNI products is around $6 billion. The potential U.S. market for its LUNAR liquid biopsies could be more than $33 billion.
Illumina
Illumina ranks as the leader in the gene-sequencing market. Cancer research and diagnostic testing is an important growth driver for Illumina's gene sequencing technology. Illumina CEO Francis deSouza stated in July that "it is increasingly clear that genomic information will transform the standard of care for oncology patients."
Although Illumina's revenue growth has slowed in 2019, this sluggishness should only be temporary. DeSouza believes that "the ubiquity and impact of genomics will dwarf everything we've seen to date." This optimism stems from multiple long-term growth opportunities for Illumina.
Oncology is one of those opportunities, especially as personalized medicines and liquid biopsies become more widely adopted. Consumer genomics is another, with individuals wanting to find out not just genetic ancestry information but also genetic health information.
Population genomics initiatives, which seek to sequence the DNA of hundreds of thousands of individuals, should be a significant growth driver for Illumina. Also, increased focus on researching rare and undiagnosed diseases will fuel demand for gene sequencing.
Illumina isn't cheap compared to many stocks, with shares trading at over 40 times expected earnings throughout most of the last five years. However, this multiple is still lower than the average forward P/E ratio for healthcare products stocks.
Intuitive Surgical
Intuitive Surgical's da Vinci robotic surgical system is used frequently to remove prostates in men with prostate cancer. Also, Intuitive's newest system, ION, helps physicians obtain biopsies from the lung for analysis to determine if a person has lung cancer.
The company has generated solid double-digit-percentage sales growth in recent quarters. Most impressively, Intuitive Surgical now makes over 70% of its total revenue from recurring sources such as replacement instruments and accessories and operating leases.
Intuitive's business model is evolving, with more customers choosing to lease robotic surgical systems instead of purchase the systems. This adds to Intuitive's nice recurring revenue. It also gives customers an incentive to stay with Intuitive when their existing systems need to be replaced because they don't have to make a major purchasing decision.
Demographic trends are a key growth driver for Illumina. As people age, they tend to have more surgical procedures, especially the kinds for which Intuitive's da Vinci is frequently used such as hysterectomies and prostatectomies. Intuitive also should expand internationally. The company's customer base is heavily skewed toward the U.S. but there are many more surgical procedures performed outside the U.S.
Innovation is another important way that Intuitive will grow. The company's new ION system is one example of expanding the use of robotic surgical technology. Expect Intuitive to also continue rolling out enhancements to da Vinci that enable more surgical procedures to be performed using the system.
Intuitive Surgical's share price might seem pricey with the stock trading at over 40 times expected earnings throughout much of the last five years. However, this level is still lower than the average for healthcare products stocks.
Risks for these cancer-fighting stocks
All of these top cancer-fighting stocks face risks that could prevent them from achieving positive returns. Each company operates in a highly regulated industry. It's possible that their experimental drugs, devices, or diagnostic tests could fail in clinical testing or not win necessary regulatory approvals. AbbVie, for example, had to throw in the towel on a seemingly promising cancer drug, Rova-T, after it flopped in clinical studies.
Even if these risks don't materialize, there's no guarantee that their products will be successful in the marketplace. Competition is intense for all of these companies. Even Illumina and Intuitive Surgical, both of which dominate their respective niche markets, face increasing competition.
Potential safety concerns about products can also cause significant problems. All of these companies are at risk of litigation if patients experience complications using their products. It's even possible that products that win regulatory approval must later be withdrawn from the market due to safety issues.
The two drugmakers on the list, AbbVie and Bristol-Myers Squibb, face uncertainty related to U.S. political pressure on drug pricing. If the companies are limited as to how they set drug prices, it could negatively impact their growth prospects.
All of the companies could potentially be hurt by major changes to the U.S. healthcare system since they all make much of their revenue in the U.S. The implementation of a single-payer healthcare system could reduce the companies' negotiating power in setting prices, resulting in lower growth than anticipated.
Great opportunities
Despite these risks, each of these five cancer-fighting stocks should have great long-term growth opportunities. They're all leaders in key areas in the fight against cancer. They all continue to invest in research and development to remain competitive. Because of this, AbbVie, Bristol-Myers Squibb, Guardant Health, Illumina, and Intuitive Surgical should deliver the market-beating gains over the long run that investors seek.
Keith Speights owns shares of AbbVie, Celgene, Guardant Health, Illumina, Intuitive Surgical, and Pfizer. The Motley Fool owns shares of and recommends Celgene, Guardant Health, Illumina, and Intuitive Surgical. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
