Investing in Cancer Treatment: Six Stock Ideas

I had the fortunate opportunity to attend leading Cancer Center M.D. Anderson’s “Day of Science”, held in their new Cancer Prevention Building on 5/17/07 and moderated by its leader, Dr. John Mendelsohn. Several of their leaders participated in the event. One can only be grateful for the existence of institutions like MDA, which is part of the University of Texas System and certainly one of the key assets of Houston, TX.

While the presentations touched several different topics, including discussions of the prevention of lung, breast and cervical cancers, MDA’s rapid development of a leading Phase 1 Clinical Trial program, surgical advances, integrative treatment (traditional and complementary therapies) , advances in the treatment of childhood cancer, progress in the treatment of Leukemia, and a rather remarkable in-house electronic medical records program, one of the key underlying themes is the personalization of prevention and treatment.

On the prevention front, Dr. Margaret Spitz explained how certain individual variables (susceptibility to nicotine addiction, for instance) can allow the doctor to gauge the risk of developing cancer, leading to preemptive treatments and diagnostics (lifestyle changes, screening, chemoprevention or even prophylactic surgery). She, along with Dr. Gordon Mills, touched on some of the reasons why individuals respond differently to different treatments (efficacy and adverse events). How the individual metabolizes a drug and how the individual repairs DNA damage stood out. While there aren’t too many sure-fire DNA tests to dictate courses of treatment, doctors are able to use the AmpliChip CYP 450 from Roche (RHHBY.PK) that is “Powered by Affymetrix” (AFFX) in some cases to best determine treatment. Biomarkers also play a role (Herceptin for breast cancer). Clearly, continued advancement in pharmacogenomics will radically improve the course of treatment.

Another conclusion is that the integration of imaging with treatment will continue to advance at a rapid pace and bodes well for companies like Varian Medical Systems (VAR), which sells radiation treatment that is being used increasingly in more complex procedures, such as neurosurgery. Both of these stocks are somewhat downtrodden and perhaps deserve a look:

As Dr. Mendelsohn pointed out, surgery remains the most effective treatment of cancer. Successful removal of a tumor has the best long-term outcomes and the least damaging side effects. In the discussion of surgery, Dr. Walsh, who heads the Perioperative Enterprise and is a thoracic surgeon, discussed minimally invasive surgery.

Among other things, he spent a great deal of time discussing the Da Vinci robot from Intuitive Surgical (ISRG) (129.21, $4.8 billion market cap, S&P 400 member). For those unaware, MDA was a rather late entrant into this rapidly growing medical treatment, purchasing their first machine last year. I learned not only that they have now done 150 procedures in the past 6 or so months, but they have also ordered an additional robot due to scheduling conflicts (just in the Urology area for the most part).

I continue to believe that ISRG is perhaps the best way to invest in Cancer. While I have owned the stock for over two years either professionally or personally, I have never been more excited about the firm’s prospects, as procedural growth is now becoming the driver rather than simply new machine installations. The chart below is remarkable given that prior to 2006, the “E” in the PE was neither taxed nor inclusive of options expense, as it is now. 41X is a high multiple, but I believe that the company can grow EPS in excess of 50% and sales in excess of 35% for quite some time. Note that the deceleration of late to “just” 54% organic growth was due to a very tough comp.

A final observation: there may be a huge back-door play to investing in Cancer. The leading cause of cancer deaths continues to be lung cancer, which is almost entirely preventable. Dr. Therese Bevers spoke in great detail about tobacco use, which is responsible for 1/3 of all cancers. While there is a tremendous number of investors (speculators, perhaps, is a better word) who pay outrageous prices for lottery tickets for cancer “cures”, it seems like there are other ways (the three stocks mentioned above, for instance) that better balance the opportunities to prevent, diagnose or treat cancer with the likelihood of failure.

In addressing lung cancer, Dr. Bevers was very excited about MDA’s tobacco treatment program that includes counseling, nicotine replacement and medications at no cost to the patient. She discussed Varenicline, being developed by Pfizer (PFE) as a much better treatment than Zyban. Also, there are three vaccines in clinical trials. Finally, and perhaps most “investable”, is Sanofi-Aventis (SNY), which has the rights to Acomplia/Zimulti (for smoking cessation and weight loss – what a combo!).

Unfortunately, PFE and SNY are so big that the impact of these drugs won’t be as significant as a successful drug out of a small biotech company, but it could still be a big catalyst. With Acomplia/Zimulti, investors may be overlooking the drug as a “cancer” play given the potential to help reduce smoking (and one of the deterrent side effects to quitting, weight gain). Diabetes and Cancer in one fell swoop!

Disclosure: No position in any stocks mentioned except for a long position in ISRG

Comments

[hillcrestln]

Very useful piece. Thanks. Why do you single out Varian? There is some concern that Siemens et al are taking market share away from it.

[AlanBrochstein]

Thanks for the comment. I have owned VAR in the past and have been negative on it for a while but am now "neutral". If you search this website, you will find an article to which I responded that explains my position to some degree.

I single VAR out because they are the clear, clear leader. For those investing in cancer treatment, they are the only choice, as Siemens is a huge (foreign) company and Elekta doesn't trade on any exchanges here. VAR is extremely innovative, and I have confidence that they will maintain their leadership in the future. My only question is really valuation, which is now much better.

As we look out into the future, expect that there will be cancer treatments that combine chemotherapy and radiation (radiation will "turn on" the molecule), and you can expect that VAR will be a leader in this field.