Many biotech investors are interested in antibody-drug conjugates, or ADCs, these days, and for good reason -- if they catch on as a mainstream cancer treatment, they could render traditional chemotherapy obsolete.
An ADC is a "smart bomb" -- a laboratory-created antibody, filled with toxins, which is trained to find a specific cancer cell. Once an ADC locates the target, it attaches to it and unloads its toxic payload into the cell, killing it while sparing nearby healthy cells.
Catching onto Wall Street's interest in this potentially game-changing treatment, many small pre-revenue biotechs have filled their pipelines with ADC candidates. Therefore, investors should better understand this new field and which major players have the most growth potential.
Let's meet the big boys To date, only two ADCs have been approved by the FDA: Seattle Genetics, Inc. (NASDAQ:SGEN)' Adcetris and Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY)'s Kadcyla. Adcetris is a treatment for lymphoma, while Kadcyla is a breast cancer treatment.
Seattle Genetics is the largest pure ADC play in the market. Last quarter, the company's revenue surged 51% year over year to $73.6 million. $35.7 million (48.5%) of its top line was generated by Adcetris, while the remainder came from collaboration, license agreement, and royalty revenue from major partners like Bayer, Roche, AbbVie, and Pfizer.
Sales of Adcetris rose 3%, collaboration and license agreement revenue climbed 166%, and royalties increased 186%. Moreover, analysts believe that Adcetris could eventually generate $600 million to $900 million in annual peak sales by 2020 -- which means that shares of Seattle Genetics could be grossly undervalued at current prices.
The second major player, Roche, is the largest cancer treatment company in the world. Breast cancer drug Herceptin, which generated $6.5 billion in sales in fiscal 2012, is its top seller.
Herceptin is a laboratory-created antibody that shares the same technological foundation as an ADC. However, instead of being loaded with toxins, Herceptin is trained to seek out breast cancer cells and block their growth signals to starve them. Herceptin can also mark cancer cells so the immune system can "see" and destroy them.
Roche's ADC, Kadcyla, produced with its partner ImmunoGen, Inc. (NASDAQ:IMGN), links Herceptin to a toxin. Kadcyla seeks out the cancer cell just as Herceptin does, but as Herceptin blocks the cell's growth signals, the toxin seeps into the cell and kills it. This is a much more potent solution than Herceptin's method of starving and marking cancer cells.
Although Kadcyla was only approved in February, it has already generated $87 million in sales in the first half of the year. Analysts believe the treatment could eventually generate peak sales between $2 billion to $5 billion.
Don't forget the smaller guys While Seattle Genetics and Roche produce marketed ADCs, there are many other companies vying for a piece of this new market. Two companies to keep an eye on are Celldex Therapeutics, Inc. (NASDAQ:CLDX) and ImmunoGen.
Celldex's price performance over the past two years has been incredible, considering that it does not have a marketed product yet. However, Celldex has two major products, which could soon put it on the map: rindopepimut, a treatment for a rare type of brain cancer (gliboblastoma), and CDX-011, an ADC for metastatic breast cancer built on technology licensed from Seattle Genetics.