Finding winners in the pharmaceutical sector is not an easy process. But it is potentially quite lucrative.
For the pharmaceutical companies themselves, the current environment for success is reminiscent of the Greek myth surrounding Sisyphus, whom the gods condemned to repeatedly roll a boulder up a hill—only to have it roll down again once he got it to the top—for all eternity.
Today’s pharmaceutical firms must use vast amounts of capital in search of a blockbuster drug, which can generate $1 billion or more in annual sales. But then, even when such a medicine is found, the benefits provided are fleeting: from the moment a drug makes it to market, the clock begins ticking on its patent exclusivity. Once this expires and generic copycats reach the market—typically within a decade or so—revenues for the original inevitably fall, and often quite rapidly.
Then, like Sisyphus, the companies climb the hill of developing blockbuster drugs again, investing anew in the whole risky and costly process of drug development.
If you are an investor in the sector, you want to focus on the companies that have drugs in their pipelines with blockbuster potential, as well as the funds necessary to propel them through several trial stages.
Since 2010, the global pharmaceutical sector has invested the equivalent of around one quarter of its revenues in drug development each year. The U.S. industry alone spent some $83 billion on R&D in 2019—when adjusted for inflation, that’s about 10 times what it spent in the 1980s!
So, which segments of the pharmaceutical industry (and which drug companies) are poised to come up with the next blockbuster drugs?
Recent advances in science are ushering in a new era of highly effective personalized medicines. So-called precision therapies are based on greater understanding of how diseases work on a molecular level. This translates to doctors being able to identify what treatments fit which patients, and why.
Precision therapies are tailored to fit specific groups of people. This means they will likely be highly effective. But can cutting-edge personalized medicines reach blockbuster drug status? The naysayers say the market size is too small…but they seem to forget that innovative drugs can command very high price tags.
Consider recent data from the drug price tracking service division of GoodRX (GDRX). It shows that, after 15 years on the market, the average drug with accelerated approval by the FDA underwent 15.4 price increases. Drugs subject to conventional approval saw 12.7 price increases in the same span of time.
Keeping an eye on the list of development-stage therapies expedited through the FDA’s approval processes can provide insight into which companies have potential blockbusters in the pipeline.
One company that fits that profile is AstraZeneca (AZN), and here’s why it is so interesting…
The company specializes in one of the areas where personalized medicine is making great strides: oncology. It already has three blockbuster cancer drugs. Per Morningstar:
Overall, the company looks well positioned for growth with the recently launched cancer drugs carrying strong pricing power that should have an amplified impact on the bottom line. We expect the first-line lung cancer indication for Tagrisso combined with the likely gains in adjuvant lung cancer will drive peak sales above $9 billion annually. Also, cancer drug Imfinzi should gain share in Stage III lung cancer where treatment options are limited and the drug holds growing potential in other cancers. Additionally, BRCA-focused cancer drug Lynparza is well positioned to gain further market share in new indications.
And now, one of the company’s other treatments, Enhertu, is viewed by some as the next big thing. It has been granted five separate breakthrough therapy designations by the FDA: three for hard-to-treat types of breast cancer, and one designation each for lung and gastric cancers.
Enhertu is an antibody drug conjugate (ADC), a type of therapy that is designed to do minimal damage to healthy, non-cancerous cells. It works by attacking tumors that test positive for a protein called HER2, which is associated with worse disease outcomes.
Known as “biological missiles.” ADCs are part of the new generation of personalized cancer treatments that target tumors with specific features, or biomarkers. Some 12 ADCs have received regulatory approval to date, while more than 100 others are in various stages of development.
Wall Street analysts believe that Enhertu has the potential to become a key growth driver for AstraZeneca. Consensus estimates are that sales could reach $4.5 billion by 2026, up from a negligible level now.
AstraZeneca’s Bright Future
The company had a relatively late start on emerging from the industry patent cliff that largely started in 2012. But today, AstraZeneca’s strong lineup of next-generation drugs should easily offset sales lost to new generic competition.
Morningstar says: “…we project the majority of new drug sales will be supported in therapeutic areas with strong pricing power with a heavy focus on differentiated oncology drugs Tagrisso and Imfinzi, Lynparza and Calquence.”
Annual sales growth over the next five years should in the 8% to 10% range as new products offset patent losses. Profit margins will expand too as high margin personalized drugs, particularly in oncology, will represent a larger proportion of overall sales over the next five years.
The stock is a buy anywhere in the $60 to $65 range.
About the Author
Tony Daltorio is a seasoned veteran of nearly all aspects of investing. From running his own advisory services to developing education materials to working with investors directly to help them achieve their long-term financial goals. Tony styles his investment strategy after on of the all-time best investors, Sir John Templeton, in that he always looks for growth, but at a reasonable price. Tony is a regular contributor for InvestorsAlley.com.