Biotech sector: the drugs that could help us live with cancer

In the biotech sector, investing in drugs that fight fat has always been a safer bet than those that treat cancer. At least 90% of cancer drugs never make it to market, so betting on a small biotech firm producing an effective cancer drug is often more akin to gambling than investing. But all that is changing. For the first time ever, cancer drugs have overtaken anti-cholesterol drugs as the industry's bestsellers. A series of targeted cancer treatments are revolutionising the way the disease is treated and sales are growing at 20% a year.

One example of the kind of drug now coming through is Avastin (see below), approved for treatment of colon cancer in 2004. It blocks the growth of blood cells that nourish tumours and has been found to slow the growth of deadly kidney cancers by 50%. "The idea is to substitute the blunderbuss of chemotherapy with the sharp-shooting of a chemical" that only targets cancerous cells, says The Economist. Big pharma has been promising a revolution in cancer treatment for 30 years and the war is far from won, but the success of these targeted treatments does mean that many forms of cancer no longer have to be thought of as terminal illnesses. "As patients live longer, cancer will become more of a chronic disease, like Aids, kept in check by targeted drugs," says Titus Plattel of market research group IMS Health. This is particularly true given that developments in nanotechnology, such as the use of microchips that scan the blood and urine for cancer particles, should soon mean that cancers can be detected three to five years earlier than at present, making them easier to treat, says Michael Orme in the Daily Reckoning newsletter.

All this optimism has fed the pace of development. There are currently 2,000 candidate drugs under development for cancer treatment and 50 new ones should reach the market in the next three years, Plattel told BusinessWeek. But the firms producing targeted cancer drugs are also finding new markets for their products. Emerging-market economies will contribute 30% of growth in drug sales this year, says Jim Jubak on MSN Money. As the Chinese population ages (average life expectancy is set to jump to 85 by 2050), this is a market that will grow and grow.

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But even in Britain, there is potential for sales to rise.

A recent survey by the Karolinska Institute found that, while more than half of cancer patients in France, Germany and Spain had access to new cancer treatments provided since 1985, only four in ten UK patients have access to the same drugs. Only 53% of female cancer patients survive five years beyond diagnosis in the UK. On the continent, 71% of patients make it that far. "The inequalities between countries in patients' access to cancer drugs cannot persist," says Dr Bengt Jonsson, co-author of the study.

According to the World Health Organisation, more than half of us will be affected by the disease in our lifetime, which should see a regular flow of money into the sector and, hopefully, an improvement in survival rates. As Leslie Berger points out in The New York Times, "almost 80% of children and teenagers diagnosed with cancer today become long-term survivors". We have a look at some of the companies that are helping make that happen below.

Two biotechnology firms with promising pipelines

The most successful of the new targeted treatments for cancer, Avastin and Herceptin, are both produced by biotechnology pioneer Genentech (DNA). What matters in terms of value for biotech stocks is the quality of drugs in their pipeline, says Brian Lawler on Motley Fool, and there are excellent prospects for its existing drugs, Rituxan and Avistan, as they gain approval to treat new illnesses. Avastin's success in fighting colon cancer gives it exposure to an $8bn market and the drug has been approved for lung and colorectal treatment. Jennifer Chao of Deutsche Bank prices the market potential for the drug at between $2.1bn and $3.4bn. The shares might look a little expensive on a forward p/e of 22, but look at the price-to-earnings-growth ratio (0.94x) and it is clear you aren't paying too much for the growth.

Amgen's (Nasdaq: AMGN) stock has suffered from panic selling over recent fears about its anaemia drugs, which face the threat of being delisted by Medicare. But the write-down seems overdone, say analysts at JP Morgan and Deutsche Bank. "Amgen's pipeline is one of the strongest, if not the strongest in the industry," says Alex Garcia on Seeking Alpha, and the firm is trading on a forward p/e of 13 times for 2008. Given that over the past ten years the shares have been valued on a p/e ratio of between 20 and 60, they now look cheap.