The Best Cancer Drug Results I've Seen
On December 2, 2015, I predicted the 2016 high for the S&P would be 2,275. On December 13, 2016, the index closed at 2,271.72. That was the high for the year, and I missed it by 3.28 points.
I haven't done quite as well this year. The S&P 500 high so far is 2,440.23. My prediction was for the high to be just 2,425. I know, I must be slipping — I missed by 15 points (so far).
Most market-types will tell you forecasts aren't worth much by themselves. They'll tell you an S&P 500 forecast and a cup of coffee will get you, well, a cup of coffee.
But then maybe they aren't able to gauge the market with such uncanny accuracy! Ha!
Seriously, I don't put too much emphasis on predictions. That said, I do like to have a game plan. I find it very helpful to map out my expectations for the economy, earnings, and sentiment. Because it's always the reaction to news that really matters.
For instance, let's recall the pathetic GDP growth the U.S. economy posted in the first quarter. The first read was 0.2%. Really bad. But investors didn't blink. That was a clear indication that investors had a good read on what was going on in the economy and had reason to believe earnings would be good. Well, earnings were good — really good. And here we are at new highs.
Now, that weak GDP number was a surprise to me, even though the Atlanta Fed had been saying that GDP growth was really weak. So, two things: First, again, it's the reactions that matter. If I simply sold out when GDP was much weaker than I expected, well, bad move. And that's what I mean about taking forecasts seriously. I consider my forecasts like trial balloons that I send up to see which way the wind is blowing.
And second, pay attention to who got it right. In this case, it was the Atlanta Fed. And right now, the Atlanta Fed says GDP growth for the second quarter is tracking darn near 4%. That means the Fed is almost certain to stick to its forecast of two more rate hikes this year. Investors are fine with that. And here we are at new highs.
Cancer Cure Getting Closer
I want to call your attention to a stock. Loxo Oncology (NASDAQ: LOXO) received breakthrough therapy designation from the FDA for its cancer drug, Larotrectinib, in July 2016. This is a new type of cancer drug, one that can go after any cancer — lung, stomach, skin, etc. — so long as certain genetic markers are present.
And over the weekend, it released some very impressive numbers. The first trial involved 50 patients; 38 had their tumors shrink, and 30 of those patients saw no new growth or new tumors after a year. That's pretty good. In fact, those are the best rates I've ever heard of, and it gets better.
If you know about immunotherapy drugs, you know the big risk is that a patient's hyper-stimulated immune system can start attacking healthy organs. That happened to my dad last summer, and treatment was suspended. He even had to take prednisone to stop his immune system from running amok. The cancer went wild in the interim, and by the time he could start treatment again, it was too late.
Well, Loxo's drug is highly tolerable: 93% of patients stayed on it for a full year. Again, that's really good.
Can You Lend Me $2 Billion?
As you might expect, these results were well received. LOXO shot up 50% on Monday to ~$70. But here's the thing: Even with that massive move higher, the market cap for LOXO is under $2 billion. That's not very expensive when you consider the revenue a blockbuster cancer drug can generate.
In 2015, the top 10 best-selling cancer drugs brought in revenue between $1.6 billion and $6.4 billion.
Please note that if you combine the 2014–15 sales for the top drug, Avastin, we're looking at $12 billion in revenue. And Loxo is currently valued at $1.8 billion — for the whole kit and caboodle.
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You can probably see where I'm going with this. Is there a pharma company that might be willing to pay $5 billion to acquire Loxo and maybe bring in a few billion a year in revenue? Uh, yeah, I bet there is. Gilead (NASDAQ: GILD) jumps to mind. It's in desperate need of a blockbuster, and it's sitting on $12 billion in cash.
Loxo's drug is expected to hit the market in 2018 or early 2019. It would be just the second drug on the market that uses genetic markers to go after any type of cancer.
Now, I know, it is hard to buy a stock after a 50% jump in one day. You can't help but be afraid that you'll be left holding the bag, that there's something you don't know. And I am not a doctor, I don't play one on TV, and I didn't sleep at a Holiday Inn last night.
So here's another idea: Why not look at that big gain from Loxo as the smartest people in the world (i.e., stock market investors) validating Loxo's drug and potential? This kind of validation is one of the great services the stock market provides for us.
On Monday, 5.9 million LOXO shares traded after the company released all this data at the annual meeting of the American Society of Clinical Oncology. That means the world's best doctors and top hedge fund and mutual fund managers were buying.
LOXO is a stock that you should keep an eye on it. Take a small position if you want, even. It could easily be six months before there's a buyout, if one comes at all. So be prepared to hold this for a bit if you buy it. Ultimately, though, I think this stock goes higher. And if its drug really is as effective as the early trials suggest, it goes a lot higher.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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