Oncology Stocks That Could Offer Supernormal Returns

A weighted portfolio of oncology investments can help an investor balance the high risk associated with the FDA approval process, and the high reward associated with early stage drugs and treatments. Here are three stocks that would fit into such a portfolio, one that offers low risk and low reward, one that offers medium risk and medium reward and one that offers high risk and high reward. As a caveat to this introduction, the risk associated with pre-approval biotechnology investing is higher than that of many other industries. Therefore, bear in mind that the low, medium and high-risk terms used throughout are relative to this industry only, and should not be thought of as cross-industry comparisons.

The first treatment, the low risk/low reward treatment, is Pfizer's (PFE) Palbociclib, previously PD-0332991. Palbociclib is an oral and selective inhibitor of cyclin dependent kinases ("CDK") 4 and 6, targeted at the treatment of post-menopausal patients with estrogen receptor positive, HER2- locally advanced or metastatic breast cancer. CDKs are protein kinases, which in turn are just chains of amino acids, and are responsible for regulating the cell cycle. The cell cycle is the process through which cells divide and replicate. The concept behind Palbociclib is relatively simple; the drug serves to inhibit the CDKs of cancer cells, interrupting the cell cycle and stopping the spread of the breast cancer.

On February 3, 2014, Pfizer announced final results from a phase II study of Palbociclib in combination with letrozole, an already approved hormone therapy drug. The top line data showed that Palbociclib achieved its primary endpoint, demonstrating a statistically significant improvement in progression free survival. The company has initiated two phase III studies, one to study the efficacy of Palbociclib in combination with letrozole and another to study the efficacy of letrozole in combination with fulvestrant, another hormone treatment marketed by AstraZeneca.

In addition to proven efficacy and the onset of phase III trials, Pfizer also announced last year that the FDA had awarded Palbociclib breakthrough status. Breakthrough status is a designation designed to expedite the development and review of treatments that treat deadly diseases. Under the terms of breakthrough status, Pfizer has the right to seek accelerated approval, which would remove the requirement for phase III data before commercialization. This could lead to Palbociclib gaining FDA approval during 2014. Pfizer reports the market potential for the as between $5-6M.

To summarize this addition to the portfolio, Palbociclib is low risk because of the size of Pfizer and the limited downside to its stock if the treatment does not receive approval and low reward because the treatment is in late stage trials and investors are already aware of its potential.

The second treatment, the medium risk/medium reward treatments, is Northwest Biotherapeutics' (NWBO) DCVax-L. DCVax-L is an immunotherapy treatment targeted at glioblastoma multiforme, one of the deadliest forms of brain cancer. The science behind this treatment roots itself in a patient's immune system. To simplify, there is a special type of immune system cell called a dendritic cell, which help the immune system identify, among others, cancer cells. They break the cancer cells down into antigens, which signal the immune system and elicit an immune response. The immune system attacks every cell that displays the antigens, removing the cancerous cells from the body. Northwest Biotherapeutics manufactures the vaccine from a small piece of tumor (removed via surgery), and the treatment is administered intravenously.
In a small phase I/II trial DCVax-L demonstrated significant efficacy, with 20 patients more than doubling the current standard of care overall survival rate of 14.6 months to 36 months. A much larger phase III trial is currently underway and, if Northwest Biotherapeutics can replicate the early trial results, DCVax-L could expose the company to a multi-billion dollar market. Northwest Biotherapeutics expects to publish the results for the trial before the end of 2015.

To summarize this addition to the portfolio, Northwest Biotherapeutics is a development stage company with no current approved treatments. The company's dependency on the success of its pipeline makes it a risky investment. However, its lead treatment has demonstrated significant efficacy in human trials and final phase trials are currently underway. The company is currently valued $273M, which offers plenty of upside potential in the event of FDA approval for DCVax-L.

The final portfolio addition, the high risk/high reward addition, is Theralase Technologies (TLTFF) (TLT.V) and its photo dynamic compound ("PDC") treatment for bladder cancer. Theralase is a 20-year-old company that has a revenue generating business model selling super pulsed lasers for pain management and cell regeneration treatment. During 2012, the company diverted some focus towards PDC treatment. In short, PDCs are a type of compound that attach to cancer cells, but do not become active until they are exposed to light. On activation, the compounds induce apoptosis, which is the natural cell death mechanism that cancer cells lack. After the apoptosis process completes, the human immune system removes the cancer cells from the body.

Theralase has identified four lead PDCs, and is targeting bladder cancer. The company is currently trialing the treatment in an orthotopic rat model, having completed a mouse model trial during 2013. In the mouse trial, Theralase injected cancer cells below the skin of a mouse and allowed a tumor to develop. The company then introduced TLD1633, one of its four lead compounds, into the cancerous region and activated the compound using a super pulse laser. Twenty-four hours post activation, the tumors cells started to die. The mouse in question survived 20 months, which is the average lifespan of a healthy mouse. In short, the PDC treatment completely cured the mouse of its cancer.

On successful completion of the orthotopic rat trial, Theralase plans to undertake a phase I/IIa trial to determine safety, toxicity and efficacy for the treatment. Favoring the PDC treatment is the fact that, in theory, it qualifies for breakthrough designation. This is the same designation awarded to Pfizer's Palbociclib, and if achieved, it would mean the FDA could approve Theralase's treatment based on the results of the phase IIa trial. This means the company could start commercialization before the end of next year, with the treatment exposing the $15.6M Theralase to a $4B market.

To summarize this addition to the portfolio, Theralase is a development stage company with a treatment that, so far, has only demonstrated efficacy in a mouse model trial. This makes it a risky addition to any portfolio. However, if the company can replicate this efficacy in humans, it could lay claim to being able to cure cancer. Breakthrough designation means Theralase could be generating multi-billions of dollars heading into 2016. In short, plenty of risk but with a huge amount of upside.

To conclude, there are numerous options to any investor looking for exposure to the oncology industry, but these are three of the most promising treatments currently under development. A portfolio weighted to account for relative risk that comprises Pfizer, Northwest Biotherapeutics and Theralase could be a high return investment during the next two years.