As pharmaceutical companies initiate human trials for potentially lifesaving cancer drugs, they often follow a well-established path. The drug’s fate at first rests on its impact among patients who have exhausted all other therapies—those for whom it could provide a miracle. If a drug shows promise within this cohort, it gradually makes its way down the diagnosis ladder, as clinicians test it against earlier stages of the same disease. With each step, the drug reaches larger populations of potential patients, and its long-term viability—both medical and financial—grows more certain.
Immunotherapy treatments are in the early stages of this march, transitioning from being last lines of defense to offering bigger, earlier breakthroughs. So-called immuno-oncology (IO) drugs are relatively recent innovations: They enlist a patient’s immune system in the fight, giving it marching orders to tackle cancer cells (rather than directly attacking tumors, as radiation and chemotherapy do). Under the right circumstances, the best IO performers can make traditional chemotherapy or surgery far more effective, or potentially even replace them, in treating many cancers.
This new paradigm has fostered tremendous optimism among doctors and patients—and among pharmaceutical firms. IO drugs were roughly a $22 billion business in 2019. Morningstar analyst Damien Conover estimates that figure will rise to $43 billion by 2023. But it could soar far higher if some therapies prove to have wider applications. (The range of potentially IO-treatable cancers has widened dramatically.)
Some of the world’s biggest drug firms have bought or developed their way into the IO world—and are seeing impressive financial results. Last year, Merck derived 24% of its $47 billion in revenue from Keytruda, its lung cancer IO treatment. By 2022, that could jump to nearly 40%, in part because Merck is spinning off some non-oncology businesses. Roche’s revenue from its lung cancer IO drug, Tecentriq, could go from 4% of the company’s $63 billion in sales to 10% in three years.
Lung cancer has been a crucial proving ground for IO drugs because it’s both common, with nearly 300,000 new diagnoses each year in the U.S., and resistant to treatment. Lung cancer immunotherapies now deliver a 20% survival rate five years after treatment—still tragically low, but well above the non-IO rate of around 6%.
Treatment of late-stage, metastatic lung cancer with IO drugs is a $20 billion market, according to Conover. If the drugs prove effective in earlier-stage treatments, the market would expand by 50%. And that’s just one type of one cancer. The prospect of using IO drugs to treat other common cancers, like those of the breast or colon, has spurred hundreds of new trials. The result is a “really broad landscape” of companies vying for breakthroughs, says Mara Goldstein, a Mizuho analyst.
The risk of failure remains high. And even when a drug proves effective, it often does so for only a small subset of patients: The chemistry behind who does and doesn’t react well isn’t always clear. Nonetheless, among the companies that can claim success so far, investors expect several to build on their early leads.
Merck (MRK, $86) surprised the market in early February when it announced that it would spin off some of its legacy drug lines, including those concentrated in women’s health, among others that had lost patent protection. It’s a sign that Merck wants to bet even bigger on oncology, making Keytruda’s performance all the more important to the company’s results. The drug’s revenues grew 55% in 2019, to $11 billion, and Merck has ongoing trials to expand the therapy to treat bladder, renal, and breast cancers, among many others. Merck currently trades at 15 times its estimated 2021 earnings, but given Keytruda’s potential, Goldstein says, it deserves a higher valuation.
Swiss pharmaceutical titan Roche earns about 57% of its pharmaceutical sales from cancer drugs. Investors have rallied to the stock recently as it became clear that Tecentriq would join those ranks, coexisting with Keytruda. Tecentriq has proved particularly effective in lung-cancer treatments when combined with chemotherapy; it’s now also used to treat so-called triple-negative breast cancers, and trials are underway for other applications. At 16 times estimated 2021 earnings, Roche’s U.S. tracking shares (RHHBY, $43) trade only slightly above the industry average.
Opdivo has succeeded for Bristol-Myers Squibb (BMY, $67) in treating melanoma and lung cancers; it now generates annual revenue of about $7 billion. Opdivo’s parent company also offers investors a way to profit from an IO drug while benefiting from greater product diversification. In January 2019, Bristol-Myers bought Celgene for $74 billion. Squabbles over the merger with activist investors and regulators depressed Bristol-Myers’s stock. But the combined companies’ performance has improved recently. And Celgene’s broad R&D pipeline brings the enterprise a range of products from outside oncology, including a drug that has shown promise in treating irritable bowel diseases. The stock trades at 11 times estimated 2020 earnings—and the company won’t require more IO miracles to attain near-term success.
A version of this article appears in the March 2020 issue of Fortune with the headline “Miracles for cancer patients, windfalls for investors.”
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