A Health Care Portfolio for the Ages: The Platform Play

A few weeks ago I rolled out a Health Care Portfolio for the Ages with the addition of Celgene and Gilead to the HealthyMoney Motley Fool CAPS virtual portfolio. Last week, I aimed to protect the portfolio with two big name dividend payers Johnson & Johnson and Abbott Labs. This week, lets continue our quest for a market-beating health care portfolio with the addition of a more exciting growth story in what I like to call, "The Platform Play."

Why a platform?
The beauty of biotechnology is its nonstop evolution into territories we can't even imagine. The invention of a new technology or the discovery of a new class of drug targets often leads to the birth of companies that disrupt the status quo. To invest Foolishly in health care, we'd really like to have the foresight to invest now in the disruptive technology of the future and reap the benefits of a continually evolving industry.

The perils of investing in a platform
Dendreon (NASDAQ: DNDN  ) is a perfect example of how investing in a platform can go wrong. Its entire business was based on an undeniably brilliant technology. Dendreon's Provenge is a revolutionary prostate cancer treatment that pioneered the immuno-oncology field. The therapy treats prostate cancer by collecting patient's immune cells, teaching them to attack tumor cells with a chemical marker called an antigen, and putting them back into the patient. A treatment so groundbreaking and elegant must be worth an investment, right? The market thought so.

DNDN Chart

DNDN data by YCharts.

But the elegance of the platform was Dendreon's downfall, as a single treatment was priced at $93,000. In a crowded market with competition from Johnson & Johnson's Zytiga, Provenge never lived up to its blockbuster expectations. It never came close to the multibillion estimated sales, the stock plummeted, and Dendreon is now shopping itself for a buyer.

Hindsight is 20/20, and you can't fault the market for the Provenge enthusiasm. So, how can we avoid the trappings of promising platforms and remember that it's the business we really care about?

In it for the long haul
As Foolish investors we're thinking about three-, five-, even 10-year investments, so there's no harm in waiting for a company to prove that its platform is effective before committing your money (or a spot in your virtual portfolio) to it. That leaves three companies that follow in Dendreon's platform footsteps -- Celldex (NASDAQ: CLDX  ) , Seattle Genetics (NASDAQ: SGEN  ) , and Immunogen (NASDAQ: IMGN  )  -- in prime position to be considered for investments.

Celldex's technology is the most direct descendant of Dendreon. Rather than priming the immune system in a lab, Celldex's lead drug candidate rindopepimut uses an antibody to deliver an antigen directly to immune cells in the body, drastically improving the cost of treatment. Rindopepimut and Celldex's other drug candidates are wholly owned, so it's entitled to all of the profits. Aided by recommendations from CNBC's Jim Cramer, Celldex's stock has soared this year on clinical trial data, but it hasn't yet proven that it can gain approval and market share.

Immunogen takes a slightly different approach. Rather than introducing immune cells to tumor antigens, Immunogen's proprietary technology is a chemical linker that fuses a tumor-killing drug to an antibody that binds specifically to tumor cells. Immunogen's "targeted antibody payload," Kadcyla, was approved earlier this year as a third-line treatment for HER2-positive breast cancer. Unlike Celldex, Immunogen outlicenses most of its drug candidates, and only reported $2.1 million of royalties on Kadcyla sales in last week's earnings report. Its wholly owned drugs still have a long way to go before approval.

Seattle Genetics' business model has the best of both worlds. Its technology is similar to Immunogen's, with a proprietary antibody-drug conjugate, or ADC. Its massive pipeline is supported by a commitment to strategic outlicensing, which cuts R&D costs and provides revenues to support development of its wholly owned candidates. The most advanced ADC, Adcetris, has seen revenues of $69.7 million in the U.S. and Canada for the first half and is in trials for 9 additional indications.

So which is the best fit?
Remember, our goal is to find a leading company in a disruptive market. I think that disruptive market is the immuno-oncology market, and all three companies are positioned to succeed. Seattle Genetics fits the bill for two reasons: It has earned a nod of approval with financial support from big pharma, and has demonstrated the ability to develop and commercialize a drug to generate significant cash flows. Immunogen is close behind, but hasn't quite put up the product sales to keep pace. With that in mind, Seattle Genetics makes the best fit for our Health Care Portfolio for the Ages, and I've added it to the HealthyMoney CAPS page. Try out your own ideas with your own Motley Fool CAPS portfolio.

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  • Report this Comment On November 05, 2013, at 11:29 AM, PharmTeam wrote:

    Hi Readers,

    Shortly after submitting this article IMGN released a statement that it had terminated it's lead ADC candidate because of infection. Just another peril of investing in a new platform, and part of the reason we've chosen SGEN - which is more experienced in advancing it's own ADC products - as the addition to the portfolio.

    Thanks for reading.

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