Four stocks with great promise

Hundreds of US companies are trying to develop compounds to attack cancer in innovative ways that are more effective and less toxic than existing treatments. Their efforts are pushing the boundaries of science. But only a handful of the companies are likely to succeed financially and join those that are already seeing billions of dollars in annual sales for cancer treatments.

Bottom Line/Personal asked biotech industry expert John McCamant to describe the strides cancer research is making today and which companies are likely to benefit investors as well as patients…

STRIDES IN RESEARCH

When I began tracking the pharmaceutical industry a quarter century ago, companies devoted very little in research dollars to cancer, a maddeningly complex disease with more than 200 types. It was simply not as cost-effective as developing drugs for such conditions as hypertension and high cholesterol.

But much has changed in the past decade. Advances in decoding the molecular mechanisms that trigger cancer cells along with powerful computer technology have helped scientists better pinpoint how cancers grow and spread.

This has led to extra years of life for many patients, thanks to new drugs such as Rituxan for non-Hodgkins lymphoma and Herceptin for breast cancer.

And over the past decade, I have seen the rise of small biotechnology companies run by executive-scientists who are motivated by the challenge of fighting cancer as much as they are by making money and rewarding shareholders.

Among recent breakthroughs: Cancer vaccines that stimulate the body’s immune system to prevent cancer cells from developing. There also are drugs that block specific enzymes and proteins that cancer cells need in order to proliferate, in effect starving the cancer to death. Another vastly promising approach: The use of monoclonal antibodies—proteins that can identify and neutralize cancerous cells precisely—to improve conventional cancer treatments by combining them with chemotherapy medications. This type of combination has been found effective in killing tumors while sparing healthy cells and reducing nausea and fatigue.

Here are four small biotech companies developing treatments that will likely improve the lives of hundreds of thousands of cancer patients and might provide a huge upside for investors willing to risk money on them (see more about risks in the box on page six)…

ImmunoGen (IMGN) has a drug called Trastuzumab Emtansine (T-DM1) that works on metastatic breast cancer. It is not approved for sale by the Food and Drug Administration (FDA) but is currently finishing Phase III clinical trials—the final stage before FDA approval, a process that typically takes six months to two years and sometimes requires further testing. T-DM1 combines ImmunoGen’s proprietary chemotherapy agent with one of the best-selling cancer drugs in the world, Herceptin, sold by the Swiss pharmaceutical giant Roche. In about 20% of breast cancer patients, tumorous cells produce a protein called HER2. Herceptin, an antibody, is given intravenously and latches onto this protein, targeting just the cancerous cells. T-DM1 increases Herceptin’s effectiveness by adding a “killing agent” that is hundreds of times more potent than typical chemotherapy agents but doesn’t activate until it is inside the tumor. In trials, T-DM1 increased the survival rates of breast cancer patients by nearly six months, compared with existing treatments. Such microcellular “smart bombs” have the potential to be used for many other types of cancerous tumors. Recent share price: $12.41.

Incyte Corp. (INCY). Myelofibrosis is a type of leukemia that causes massive enlargement of the spleen and can require bone-marrow transplants. Last year, Incyte began selling the only FDA-approved treatment for myelofibrosis. The drug Jakafi belongs to a class of medicines called JAK inhibitors, which can be taken in pill form and work by blocking two enzymes involved in the formation of cancerous blood cells. The CEO of Incyte, a former associate professor of medicine at Harvard Medical School who created one of the biggest-selling HIV drugs, Sustiva, is adapting Jakafi for use with hematological cancers such as polycythemia vera and essential thrombocythemia. Recent share price: $16.07.

OncoGenex Pharmaceuticals (OGXI) has a drug that augments chemotherapy treatments for prostate cancer, which accounts for roughly one in every four newly diagnosed cancers among men and kills more men than any other cancer except lung cancer. Prostate cancer cells can be especially difficult to kill because they adapt to and resist chemotherapy by producing a protein called clusterin. OncoGenex’s OGX-011, currently in Phase III clinical trials, blocks production of clusterin. In combination with one of the most commonly used chemotherapy agents, Paclitaxel, OGX-011 increases survival time of patients with advanced prostate cancer by nearly seven months.

OncoGenex has partnered with Teva Pharmaceuticals, the largest generic drug manufacturer, to develop the drug. Teva hopes to sell OGX-011 in combination with a generic form of Paclitaxel to create a relatively low-priced treatment. OGX-011 also may be effective for lung cancer. Recent share price: $11.83.

Pharmacyclics (PCYC) has a very exciting cancer drug in Phase III trials—one likely to earn billions of dollars a year if the FDA approves it. Ibrutinib blocks a vital enzyme in leukemia cancer cells that allows them to proliferate. It is taken in pill form and produces very minimal side effects. Clinical data for Ibrutinib is so promising—there are strong indications that it also works for other major cancers such as non-Hodgkins lymphoma and multiple myeloma, as well as autoimmune diseases such as rheumatoid arthritis—that Pharmacyclics has signed a nearly $1 billion deal with Janssen Biotech, a pharmaceutical division of Johnson & Johnson. Wall Street has taken notice of Pharmacyclics’ potential. Its stock jumped nearly 400% in 2012, but I think it can move even higher. Recent share price: $57.66.

3 WAYS TO SPOT A WINNING ANTICANCER STOCK

Only a handful of the hundreds of publicly traded biotech companies developing cancer treatments have profits or even a product on the market, so small investors are largely betting on the potential of drug compounds in development. That makes these high-risk, high-reward stocks best for aggressive investors willing to accept lots of volatility. A biotech’s stock price often swings up and down based on the results of clinical testing of its drugs, and only a handful of cancer drugs receives approval for sale to the public from the FDA each year. For those that do, however, the payoffs can be staggering. One of the biggest gainers in the entire stock market over the past year and a half is Medivation, whose stock shot up by more than 600% over the past 18 months thanks to FDA approval of Xtandi, a daily cancer pill for advanced prostate cancer.

I look for companies that have…

A drug in late-stage clinical trials. The FDA requires drugmakers to navigate a three-phase testing process to demonstrate a drug’s safety and effectiveness before approval for sale. Biotech stock prices often soar during late-stage Phase III trials because the drug may be only a year away from FDA approval.

Partnerships with world-class pharmaceutical companies. Bringing a cancer drug to market typically takes five to 10 years and costs $400 million to $1 billion or more. To help cover those costs, biotechs partner with companies such as Pfizer and Roche. Once a drug is FDA-approved for sale and pharmaceutical companies try to turn it into a global blockbuster, they often buy up the entire biotech company—a bonanza for the biotech’s shareholders.

A deep pipeline of new drugs. I like to invest in biotech companies that aren’t just betting on one promising drug but are engaged in tests and trials with multiple drugs.