The recent announcement by Swiss pharmaceutical giant Novartis that it would acquire U.S.-based AveXis Inc. for US$8.7 billion brought gene therapy into sharp focus. Gene therapy, a rapidly growing slice of the overall healthcare market, uses human genes to treat or prevent disease. Simply put, it is a technique to fix or forestall an intractable genetic problem at its very source.
In the future, it's expected, this technique could replace drugs or surgery by treating a genetic disorder by inserting DNA directly into a patient's cells, according to Genetics Home Reference, a service of the National Library of Medicine (NLM), part of the U.S. Department of Health and Human Services.
Currently a handful of companies are working to develop drugs that modify human genes in a market that is projected to skyrocket from US$584 million in 2016 to about US$4.5 billion by 2023, growing at 33.3% annually, according to a global market study from Allied Market Research.
Spurred by the recent U.S. FDA nod to the therapy, these companies are pushing hard to stay ahead of the curve by cranking up product innovation -- through in-house research, collaborations and acquisitions -- to develop cures for a range of life threatening medical conditions including cancer, haemophilia, muscular degeneration and potentially to help astronauts survive extreme levels of radiation in space.
As gene therapy moves to the forefront of medicine, these companies are well positioned to benefit from a pipeline of existing and new gene therapy products that could create a long runway of revenue and profitability growth.
| Pfizer Inc. | ||
| Ticker: | PFE | |
| Current yield: | 3.58% | |
| Forward P/E: | 12.4 | |
| Price: | US$36.56 | |
| Fair value: | US$43.50 | |
| Value: | 16% discount | |
| Data as of April 16, 2018 | ||
Pfizer (PFE) is one of the world's largest pharmaceutical firms with over US$50 billion in annual sales, the majority of which are in prescription drugs and vaccines. Pfizer's products, which include top sellers Prevnar 13 -- a vaccine for meningitis -- and Lyrica for epilepsy and neuropathic pain, are sold globally, with international sales representing close to half of total sales.
Pfizer aims to build an industry-leading gene therapy portfolio through in-house capabilities, strategic tie ups, and merger and acquisitions. As part of that vision, the U.S. pharma behemoth recently collaborated with Sangamo Therapeutics to develop a gene therapy to treat amyotrophic lateral sclerosis (ALS), a disease that affects nerve cells in the brain and the spinal cord. Another partnership with Spark Therapeutics seeks to develop a gene therapy for haemophilia B, a rare blood disorder. Pfizer has been pouring millions of dollars into expanding its gene therapy research and development capabilities.
These initiatives are supported by strong cash flows generated from a basket of diverse drugs. The wide-moat drugmaker's financial resources and established research power "confer significant competitive advantages in developing new drugs," says a Morningstar equity report. "This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business."
The Viagra maker's portfolio includes several potential blockbusters in cancer, heart disease and immunology. "Pfizer's patent-protected drugs carry strong pricing power that enables the firm to generate returns on invested capital in excess of its cost of capital," says Morningstar sector director Damien Conover, who recently raised the stock's fair value from US$38 to US$43.50. "Further, the patents give the company time to develop the next generation of drugs before generic competition arises."
| BioMarin Pharmaceutical Inc. | ||
| Ticker: | BMRN | |
| Current yield: | - | |
| Forward P/E: | 119.0 | |
| Price: | US$82.94 | |
| Fair value: | US$107 | |
| Value: | 22.5% discount | |
| Data as of April 16, 2018 | ||
With a focus on cures for rare diseases, Biomarin (BMRN) markets therapies independently or through joint ventures.
The company, which has potential new therapies in various phases of clinical trials, is pushing to take things to a whole new level with gene therapy. Results of the recent clinical trials from BioMarin, and the prospect of a possible one-off cure for rare genetic conditions like haemophilia, has generated widespread hope and excitement in the medical community. Known as valoctocogene roxaparvovec, the treatment was granted Breakthrough Therapy status by the FDA, a program intended to speed up the development and review of new drugs.
"BioMarin is amassing a portfolio of genetic-disease therapeutics," says a Morningstar equity report, noting that while "commercialization and research and development expenses have kept BioMarin in the red, we're confident in the profit-generating power of its rare-disease treatments."
A deep in-house pipeline and the ability to supplement growth with strategic acquisitions place the company in a strong position. "BioMarin's life-saving therapies may serve only a few thousand patients globally, but with six-figure price tags on most products and high barriers to entry, we see this as a very attractive marketplace," says Morningstar sector strategist Karen Andersen, who pegs the stock's fair value at US$107.
Although only 3,000 people in the developed world are afflicted with the life-threatening disease MPS I, BioMarin's first drug for its treatment, Aldurazyme, carries a price tag of US$200,000 and is now a US$200 million product thanks to market monopoly. BioMarin is also well-positioned to treat the entire spectrum of patients with PKU, a metabolic disorder, for which no alternative drug therapies exist, says Andersen, who projects 20% average annual sales growth over the next five years, driven by international growth and ongoing and upcoming drug launches.
| Novartis AG ADR | ||
| Ticker: | NVS | |
| Current yield: | 3.67% | |
| Forward P/E: | 15.3 | |
| Price: | US$81.02 | |
| Fair value: | US$87 | |
| Value: | 6.9% discount | |
| Data as of April 16, 2018 | ||
Novartis (NVS) develops and manufactures branded drugs, generic pharmaceuticals, eye care products and consumer products. The company has a global footprint with the U.S. accounting for nearly a third of total sales.
The firm is betting big on the fast-evolving field of medical treatment through gene manipulation. It recently agreed to make a US$8.7 billion acquisition of gene-therapy company AveXis Inc. The deal comes close on the heels of another in which it agreed to pay Spark Therapeutics US$105 million upfront and $65 million in milestone payments for rights outside the U.S. to the latter's one-off gene therapy, Luxturna, to cure blindness. The firm's CEO, Vas Narasimhan, recently expressed his keenness to build a growing pipeline of gene therapies across therapeutic areas.
With entrenched position in multiple key healthcare businesses, the Swiss pharmaceuticals heavyweight is well-placed for steady long-term growth, says a Morningstar equity report. "Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat," the report notes.
The wide-moat firm's pharmaceutical segment is poised for long-term growth fuelled by new pipeline products and existing drugs. "Novartis differentiates itself because of its sheer number of blockbusters, including Gilenya for multiple sclerosis, and Afinitor and Tasigna for cancer," says Conover, who appraised the stock's fair value to be US$87. As well, the company has generated a strong late-stage pipeline with recent launches of heart failure drug Entresto and immunology drug Cosentyx.
Novartis is positioned well to make a major acquisition, Conover notes, adding that "given the firm's lagging position in immuno-oncology, Bristol Myers represents an attractive target for the firm."
