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Beating the Market to the Future of Medicine
By Rob Spivey, director of research, Altimetry
I still remember the day my father forbade me from going to medical school…
My father was an oncologist for 40 years. So he understood the challenges of the health care industry better than most.
He was taking care of patients in what often felt like a losing battle. All he could do was slow the progression of disease… not stop it. He didn’t want me to carry the same burden.
But if we’d had the exact same conversation today, perhaps he’d have changed his tune…
I vividly remember asking him about a pharmaceutical company we were researching back in 2019. This company didn’t just make your typical chemical-based pharmaceutical drugs.
It developed monoclonal antibodies (“mAbs”)… a type of drug grown using biologic materials like cells and complex proteins.
My father explained that mAbs were truly a miracle drug for some folks. One of his patients had been battling cancer for years with a bleak outlook. But within months of starting a new mAb drug, her tumor was shrinking.
She went from a severe case to merely being monitored. And she’s not alone.
MAbs are proving to be a remarkable treatment option… and a hidden opportunity for savvy investors.
MAbs take antibodies – your body’s natural defense against disease – and weaponize them to find tumors…
Typical cancer treatments like chemotherapy hurt all of your cells. But mAbs target cancer cells and help the immune system destroy them with greater precision.
That often means better outcomes… and fewer serious side effects.
Two of the most prominent mAbs on the market are Keytruda – from oncology treatment leader Merck (MRK) – and Bristol-Myers Squibb’s (BMY) Opdivo. The drugs are approved to treat everything from lung and stomach cancer to melanoma and lymphoma.
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Opdivo and Keytruda both have a list price of nearly $200,000 for a yearly supply. Other mAbs are similarly expensive.
To address this high cost, drug companies sometimes cover the first four months of treatment.
If the treatment is successful, the health insurer reimburses the rest of the treatment, which typically extends several more months.
This strategy helps keep mAbs widely prescribed…
That’s a huge win for biopharma companies in the growing oncology treatment market. Global spending on cancer drugs was up from $150 billion in 2019 to nearly $225 billion last year. It’s expected to reach more than $400 billion by 2028.
We’ve seen firsthand what a single effective mAb can do for a company like Merck, which we recommended to our Hidden Alpha subscribers back in October 2021.
Merck’s Keytruda hasn’t stopped winning since our recommendation. It received 10 approvals last year alone. Sales for the drug were up 16% year over year in the second quarter of 2024.
And our Hidden Alpha position is up more than 30%… with more room to run.
Merck’s treatment is particularly powerful because it’s used in many combined therapies. Other drugs can catch a ride on Keytruda, which excels at finding tumors.
That makes these drugs, which can help treat specific tumors, even more productive.
And it means Keytruda shouldn’t see a big drop-off in profits when its patents expire… because it will still be used in combined therapies.
The market is often slow to come around to newer treatments like mAbs…
That’s exactly what we’re still seeing with Merck today. Uniform return on assets (“ROA”) improved from 17% in 2021 to 19% last year as Keytruda became a dominant player in the oncology space.
Wall Street analysts expect it will increase even more, reaching nearly 20% by 2025. But the market still expects returns to shrink to 11% by 2028, below the corporate average.
Take a look…
Merck’s returns haven’t been that low since 2019, before Keytruda took off. These expectations make no sense at all for the maker of a blockbuster drug with lots of runway left.
As so often happens, the market’s misunderstanding is our opportunity…
Investors still haven’t accepted the groundbreaking impact of mAbs like Keytruda and Opdivo.
But the health care industry has… and top biopharma players will keep leveling up as their drugs get approved for new treatments.
There’s a lot of room for the makers of these drugs to impress the market. MAbs could be behind your portfolio’s next big winner.
Regards,
Rob Spivey
October 24, 2024
P.S. Hidden Alpha subscribers who followed our advice have locked in 100%-plus partial gains, three separate times, so far this year. And we think there’s more where that came from…
Each month, my colleague and Altimetry founder Joel Litman recommends a misunderstood large-cap stock… with strong fundamentals… and up to triple-digit upside potential.
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