State of the Union Address Investing Idea: Precision Medicine

From education to foreign policy to immigration, President Barack Obama covered a lot in his State of the Union speech on Tuesday evening. While healthcare was a minor part of the address, it stood out as one of the most investible topics mentioned by the president:

Source: Whitehouse.gov.

Tailoring treatmentsWe're supposed to get more information about this new initiative when Obama's budget proposal is released, but I'm not really sure what's so new about "precision medicine."

For years, the biotech industry has been doing precision medicine, which targets precise genetic defects that lead to a given disease in order to tailor treatments to the patient populations most likely to benefit from them.As such, the one-size-fits-all approach to drug development is a rarity these days.

BioMarin Pharmaceutical has a stable of drugs designed to treat hereditary diseases by replacing proteins that are mutated in patients. Ditto for Alexion Pharmaceuticals .

To highlight the benefits of "precision medicine," Obama invited William Elder, a cystic fibrosis patient, to sit with the first lady during the address. The drug Elder takes wasn't mentioned by name, but Vertex Pharmaceuticals' Kalydeco is the logical conclusion, since it's the only drug approved drug to treat the underlying genetic mutation that causes cystic fibrosis.

Many targeted cancer treatmentsfit in the class of precision medicine. Roche's Herceptin, for example, treats patients with tumors that have elevated levels of Her2,a protein that promotes tumor growth. Pfizer's Xalkori treats lung cancer with a mutation in a gene called ALK (anaplastic lymphoma kinase). Novartis' Gleevec treats leukemia caused by the fusion of two genes when chromosomes 9 and 22 swap ends.

The investor ironyObama said he wants "the country that eliminated polio and mapped the human genome to lead a new era of medicine -- one that delivers the right treatment at the right time."

Interestingly for investors to note, Jonas Salk, who developed the polio vaccine, made little to nothing from his invention. "There is no patent. Could you patent the sun?" Salk told Edward R. Murrow in a television interview.

While started by the U.S. Department of Energy and the National Institutes of Health, the sequencing of the human genome was completed by an international consortium that included scientists in the United Kingdom, France, Japan, Germany, China, and other countries.

Celera Genomics conducted a separate program to sequence the human genome, but the company never really profited from the effort. Quest Diagnostics bought up Celera, but investors that bought at the height of the genome-sequencing hype didn't make out too well.

Human Genome Sciences, which was built on the idea of using knowledge of the human genome to design drugs, topped out at $100 per split-adjusted share in 2000; GlaxoSmithKline bought the company in 2012 for $14.25 per share.

Maturing fieldTo design drugs for genetic mutations, you must find the genetic mutations first. The falling cost to sequence human genomes has made it much easier to do precision medicine and allowed companies to profit from it.

While there are many drugs on the market, and many more in the clinic, that I would put in the class of precision medicine, the field is far from mature. There are numerous diseases in which the underlying causes still aren't known, so the medications can only treat the symptoms.

The financial downside to treating a subset of patients is that precision medicine drugs need to be priced higher. The cost of developing drugs is about the same as with other pharmaceuticals, so companies have to charge more to make up for the lower volume.

For example, Vertex's previously mentioned Kalydeco sells for about $300,000 per year. As long as insurance companies and the government are willing to pay up, companies can make money developing precision medicine. If you're going to invest in companies focused on this business, though, keep in mind that any pushback on price will likely send the stocks prices tumbling.

Some precision medicine stocks to explore furtherAlong with BioMarin, Alexion, and Vertex, here are a few more companies working on precision medicine. This isn't an exhaustive list by any means -- feel free to pitch your favorites in the comment box below -- nor is it an endorsement to buy; do your own due diligence.

Sarepta Therapeutics is working on treatments for Duchenne muscular dystrophy, which is caused by a mutation on the X chromosome.
bluebird bio is working on gene therapy for hereditary blood disorders including beta-thalassemia major and sickle cell disease.
Biogen Idec and Novo Nordisk have drugs on the market to treat the different types of hemophilia.

The article State of the Union Address Investing Idea: Precision Medicine originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends BioMarin Pharmaceuticals and Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.