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  • Home>Research & Insights>Sector Rap>Opportunities in Immuno-Oncology

    Opportunities in Immuno-Oncology

    New cancer treatments show promise for patients and investors.

    Laura Lallos, 08/14/2017

    Morningstar’s equity analysts find the U.S. market overall somewhat overvalued, but there are pockets of opportunity for long-term investors. Pharmaceuticals are one of those areas, and some key players in the sector are fortifying their moats with emerging immuno-oncology drugs, as discussed in a recent white paper from Morningstar Research Services.1

    To explore these opportunities, I spoke with co-author Damien Conover, director of pharmaceutical research. Our conversation took place June 1 and has been edited for length and clarity.  

    Laura Lallos: What prompted your recent report on immuno-oncology drugs?
    New cancer treatments show promise for patients and investors.
    Conover: There are two factors driving our research on immuno-oncology. The ability to innovate new drugs to offset products losing patent protection is really a core element to the wide economic moats for large-cap pharmaceutical and biotechnology firms. When we think about the next generation of products, immuno-oncology drugs are very transformative, with a lot of pricing power, and will likely result in a lot of cash flow for these pharmaceutical firms, helping them to offset some of the patent losses.

    The other piece is that a lot of data is coming out rapidly in immuno-oncology, such as at the American Society of Clinical Oncology meeting in early June. We’re trying to help set the stage for investors to appreciate the potential for these drugs to not only drive cash flows but reaffirm our wide economic moat ratings for a lot of the firms we cover.

    Dr. Tanguy Seiwert from the University of Chicago recently joined us on a call where he talked about how he’s using these immuno-oncology drugs in practice. We came away feeling that these drugs are going to be used very rapidly and will prolong patients’ lives. That will encourage more prescribing of these drugs; they are going to be very important to patients and from the perspective of generating cash flows.

    What advantages do these drugs have over older-generation chemotherapy treatments?

    Conover: Chemotherapy is the core bedrock for most cancers, but it is a blunt instrument. It kills the cancer, but it kills a lot of other living parts of the body around it, and it can have a lot of side effects. And it typically doesn’t have a very good long-term survival rate.

    The new oncology drugs try to be more precise with the drug treatment, and they allow the body to work like it’s supposed to. Generally, when people develop some sort of tumor, the body will recognize it and T cells will knock it out. With cancer, the tumor cell will start to evade the T cells. These new oncology drugs make the tumor more visible to the T cells, enabling the body to act like it should. That should lead to much better long-term outcomes, and so far, it is, especially for certain types of patients.

    Pricing power is key to pharmaceutical moats, and the possibility of legislative price limits poses a threat, as do secular trends such as supply chain consolidation. Are immuno-oncology drugs better able to withstand such threats?

    Conover: Because of the innovation that they offer and the complexity of the treatment—meaning it’s hard to substitute some products based on how these labels are being developed for each drug individually—it’s very unlikely you’re going to see a massive amount of pricing pressure for immuno-oncology drugs.

    Laura Lallos is a former Morningstar analyst and editor, and a frequent contributor to Morningstar Advisor magazine.