Profit From the Next Innovative Class of Drugs

This article is part of our Innovation in America series, in which Foolish writers highlight examples of innovation going on today and what they see coming in the future.

Innovation in drug development comes in waves. Important discoveries often lead to not just one drug, but a multitude. Understanding the biology of a disease, for instance, can often lead to multiple drug candidates, sometimes improving on each other and other times just rehashing the same mechanism.

The discovery of a new class of drugs, on the other hand, tends to have an even greater impact because it can be used to treat a wide variety of diseases.

A brief history
The modern age of drug development started with small-molecule drugs that are synthesized chemically. They're typically designed to bind to a protein and inhibit its function. Pfizer's (NYSE: PFE  ) Lipitor, for instance, reduces cholesterol levels by inhibiting a protein called HMG-CoA reductase, which is in the pathway that eventually produces cholesterol.

It's also possible to bind to a protein and promote its function. For example, the binding of Arena Pharmaceuticals' (Nasdaq: ARNA  ) lorcaserin to one of the serotonin receptors activates it, which leads to patients feeling satisfied and eating less.

Next came biologics, which are proteins produced in living cells. Adding extra protein to the body generally has a positive effect on a pathway. The first product out of Genentech, now part of Roche, approved in 1985, was human growth hormone, which, as the name implies, stimulates growth. Amgen's Epogen stimulates red blood cell production, which is important for patients with anemia caused by treatment with chemotherapy or kidney disease.

Orphan diseases are often treated with biologics because the diseases are typically caused by inherited mutations that render a protein inactive. Putting the protein back into the body can reverse some or all of the manifestations of the disease.

Monocolonal antibodies are an ever-growing subset of biologics. Like small-molecule drugs, antibodies are usually targeted at proteins to inhibit their function. Abbott Labs' (NYSE: ABT  ) Humira, which inhibits TNF-alpha to dampen the overreaction of the immune system that causes rheumatoid arthritis and other auto-immune diseases, is expected to become the top-selling drug worldwide this year.

So what?
Amgen rose 3,500% during the 1990s as biologics took off. Genentech was spun out of Roche for a split-adjusted $12.13 per share in 1999 and reacquired by Roche 10 years later for $95 per share.

An investment in Abbott in late 2000, when the company bought the rights to Humira, has almost doubled including dividends, which isn't too shabby considering that it's a large cap. The S&P 500 has only increased about 26% over that time frame.

What's next?
My guess for the next prolific drug class is RNAi.

Rather than inhibiting a pathway at the protein level, RNAi breaks down the mRNA molecules that are the intermediary between DNA genes and the proteins they encode for. No mRNA, no protein. You can't increase protein levels with RNAi, but you can down-regulate an inhibitor of a pathway, which in turn increases the pathway's activity.

Guessing the timing of when RNAi will be great has been a little tougher.

Five years ago, everyone was betting on it. Merck (NYSE: MRK  ) bought Sirna Therapeutics for $1.1 billion. Novartis made a major deal with Alnylam (Nasdaq: ALNY  ) . The latter was on fire, seeing its stock rise 450% after being a public company for just over three years.

But these things take time. RNAi works well once the molecule is in the cell. Getting the inhibitor in there at high enough concentrations has proven more difficult. Alnylam and collaborators have developed new delivery systems that seem promising, especially when delivered to the liver, where most drugs go anyway.

Alnylam looks more appealing than it did five years ago. Just realize this is still a long-term investment; there's still a long way to go before RNAi is as big as biologics are today. Neither Alnylam nor its collaborators have any drugs in phase 3 development. And we'll need to see it prove successful treating multiple diseases before we can call it the next innovative class of drugs.

Innovation now
Can't wait that long? Fool analysts believe they've found three disruptive technology stocks. You can find out what they are in the Fool's new free report "3 Stocks to Own for The New Industrial Revolution." Gain access for free by clicking here.

Read more about innovation today and its future in America; head back to the series intro for links to the entire series.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Pfizer. The future of the Motley Fool's disclosure policy is so bright its father calls it sun.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 20, 2012, at 4:42 PM, WCoastGuynCA wrote:

    Don't ignore Mannkind (MNKD) with its insulin drug, Afreeza, in phase three trials and three other drugs for the treatment of various cancers that are in trials. Mannkind's Technosphere technology also offers the potential for development of unique delivery systems for numerous drugs currently on the market today.

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