As we bid farewell to 2013 and think about where we've been, where we are, and where we're going, it's clear that we're in the midst of a great transformation in the treatment of cancer. With biologic drugs representing some of the most lucrative therapies in history and a burgeoning understanding of the cellular basis for cancer, it's no surprise that Science magazine has named cancer immunotherapy as 2013's Breakthrough of the Year. In fact, this new era in biotechnology has drawn some of the biggest names in health care, like Merck (MRK 0.15%), Roche (RHHBY 1.45%), and Bristol-Myers Squibb (BMY 0.64%), to develop their own immune-stimulating cancer fighters. Let's dig deeper into this exciting field that represents a triumph for scientists and a new hope for patients.

What is immunotherapy?
Cancer cells are fundamentally different than other cells in their ability to replicate uncontrollably and fend off the watchful eye of immune cells trained to gobble them up. The goal of immunotherapy is to tip the scale in favor of the immune system to fight off tumor cells without dumping traditional toxic chemotherapy into the patient. There appear to be two ways to do that: turn the immune system on, or train the immune system to specifically battle tumor cells that it otherwise might have ignored. Both approaches seem to work in clinical trials, and there are some exciting drugs in each class worthy of a closer look.

Checkpoint inhibitors
The immune system is extremely tightly regulated. Too active and you get autoimmune disorders; too quiescent and the common cold can be deadly. Some tumor cells have a Programmed Cell Death Ligand, or PDL-1, that tells Programmed Cell Death Receptors, or PD-1 receptors, on immune cells to shut down. Antibodies designed to bind to either of those proteins keep immune cells on high alert and have been useful in treating cancer.

Bristol-Myers Squibb's nivolumab is the most advanced PD-1 inhibitor in development. It has been the talk of the town since presenting phase 1 data at the ASCO conference this summer. Those data showed a response rate of 53% in patients with late stage melanoma taking Bristol's other benchmark melanoma therapy, Yervoy. Now nivolumab is in phase 3 trials with and without Yervoy, and is also being tested in patients with non-small cell lung cancer and kidney cancer.

Merck is hot on Bristol's heels with its own PD-1 inhibitor, lambrolizumab. The drug showed results similar to nivolumab in treating advanced melanoma, and is in mid and late stage trials for breast cancer, bladder cancer, and lung cancer. After several development failures lately, lambrolizumab is a major focal point of Merck's R&D restructuring plans.

Roche's Genentech is quickly becoming a powerhouse in immunotherapy. It possesses the lead PDL-1 inhibitor, MPDL3280A, also being tested in non-small-cell lung cancer, melanoma, and kidney cancer. Interestingly, the drug seemed to be more effective in smokers, a group that is historically difficult to treat. That suggests a mechanism for smoking-induced cancer, and also suggests that PDL-1 expression is an important biomarker for treatment efficacy. Roche is working on a companion diagnostic to help identify patients that will benefit most from PDL-1 inhibition.

We'll have to wait for larger phase 3 trials to see which drug is most effective, but with Yervoy in hand as an add-on therapy Bristol is most likely to find success in the immunotherapy space.

The cancer vaccine
The other approach -- to train immune cells to specifically attack tumor cells they otherwise would have ignored -- has had a tumultuous history. The most notable cancer vaccine flop, Provenge from Dendreon, fought prostate cancer by removing white blood cells from the patient, conditioning them with markers for tumor cells, and reimplanting them. The treatment appeared to work, but the $93,000 price tag for a single treatment left Dendreon lacking buyers, and the company is now looking to be acquired.

Celldex (CLDX 0.83%) has picked up where Dendreon left off with a cancer vaccine that works directly in patients. Celldex's lead candidate, rindopepimut, primes the immune system to attack cells expressing a mutated version of epidermal growth factor that shows up in some cases of the brain cancer glioblastoma. After improving overall survival in a phase 2 trial, rindopepimut is now being investigated in a phase 3 trial. Excitement surrounding Celldex's approach made it one of the best performing health care stocks in 2013.

The bottom line
Because these two approaches target different components of immune function, they have a great potential to work synergistically. The real jackpot for investors in companies with PDL-1 inhibitors in the pipeline is a demonstrable effect in multiple cancer types. That versatility will enable the drug to be paired with countless targeted therapies as an adjunct to boost treatment. For investors in companies with targeted cancer vaccines, look for management teams willing to collaborate on, or even out-license, a drug to be packaged with one of the big PDL-1 players.