1 Small-Cap Biotech Stock to Buy and Hold For the Next 10 Years

Source: U.S. Food and Drug Administration, Facebook.

Investing in the biotech sector can sometimes be compared to throwing darts at a dartboard. Every once in a while you'll hit the bullseye, but most of the time you'll miss the mark (or the entire board).

Small-cap biotech: big reward potential, bigger risk Small-cap biotech stocks are usually the greatest allure for investors because they offer the most upside if you pick right. Unfortunately, they can also be incredibly risky. Small-cap biotech stocks are predominantly undiscovered by Wall Street, have a relatively thin pipeline that's usually just a couple clinical compounds deep, and they're normally unprofitable and reliant on common stock offerings, debt issuances, and collaborations in order to raise sufficient cash to run their operations.

But if you happen to buy a company whose pipeline hits big, your returns can be multiplied many times over. Just take a look at Pharmacyclics, which traded at less than $1 in 2009 before its cancer drug Imbruvica dazzled as a blood cancer treatment in clinical trials, resulting in the company being bought out by AbbViefor $262 per share last month.

To be clear, the chances of finding the next Pharmacyclics are pretty slim. In 10 years we'll likely look back and determine that there were a few plain-as-day small-cap bargains, but most were a bunch of lemons. However, I'd suggest there's one small-cap biotech stock that risk-friendly investors can consider buying and holding over the next 10 years that could actually net substantial returns.

This small-cap biotech stock is none other than ImmunoGen .

What separates ImmunoGen from other cancer fightersImmunoGen's potential claim to fame is its antibody-drug conjugate, or ADC, development platform.

Investor presentation slide. Source: ImmunoGen.

The most common method of attacking cancer is chemotherapy, which is nothing more than an anti-cancer or group of anti-cancer drugs that targets rapidly dividing cells throughout the body. The goal of chemotherapy is to stop cancerous tumors from growing and spreading. Unfortunately, because chemotherapy is a global body treatment, it's indiscriminate in regard to what cells it attacks. In short, chemotherapy kills healthy cells as well as cancerous ones and can lead to some very unpleasant side effects.

ImmunoGen's ADC technology comes into play by utilizing a cancer-seeking antibody and linking a chemotherapy toxin directly to that antibody. When the antibody comes in contact with the targeted cancer cell it releases the toxin, killing the cancer cell. A good analogy for an ADC is a heat-seeking missile. Imagine the heat sensor is the antibody, while the explosives within the shell of the rocket are the toxin meant to destroy the cancer cell.

The goal of ADCs is to reduce the amount of healthy cell death and more precisely target higher doses of chemotherapy into a tumor. ImmunoGen, Seattle Genetics, and Immunomedics are three of a very small group of ADC developers.

Why you can buy and hold ImmunoGen for 10 yearsImmunoGen stands out from all other small-cap biotech stocks as a company you can buy and hold for 10 years for two particular reasons.

Investor presentation slide. Source: ImmunoGen.

First, ImmunoGen can easily monetize its drug development platform and experimental drugs. If you think about it, ImmunoGen's linking technology is almost dependent on it finding a partner, or at least in seeking out potential combo therapies. When ImmunoGen lands a licensing or collaboration partner it's often entitled to an upfront payment as well as potential development, regulatory, and sales milestones. These upfront, milestone, and possible royalty payments give ImmunoGen an opportunity to generate substantial cash flow that it can tap to help pay for its drug development instead of constantly diluting shareholders with common stock offerings.

As a case in point, ImmunoGen earlier this week announced a deal with TPG Special Situations Partners that'll net it $200 million in upfront payments in exchange for 100% of the royalty revenue stream for Kadcyla, ImmunoGen's only Food and Drug Administration-approved cancer drug. ImmunoGen stands to eventually get 85% of its royalty revenue stream back once its partner, Roche , has paid between $235 million and $260 million in royalties to TPG Special Situations Partners, depending on timing.

Secondly, ImmunoGen has a bounty of high-profile collaborative partners and a monstrously deep pipeline. At the moment ImmunoGen has 13 compounds in clinical testing as well as nine other compounds in preclinical testing. Four of its 22 compounds are being developed in-house (three of which are in phase 1 studies, the other in preclinical trials), while the remainder are partnered.

But ImmunoGen has plenty of opportunity beyond Kadcyla, even if Kadcyla has been its cash cow thus far. BT-062, for instance, is an ADC being developed alongside Biotest that targets CD138 and is being examined in a number of indications, including multiple myeloma, metastatic bladder cancer, and triple-negative metastatic breast cancer. SAR3419 is another intriguing ADC compound being developed with Sanofithat's targeting CD-19 as a possible treatment for diffuse large B-cell lymphoma.

With nearly two dozen compounds, ImmunoGen is getting plenty of swings to hit one out of the park.

Remember, no stock is perfectOf course, any investors seriously thinking about holding ImmunoGen over the next 10 years need to also consider the risks.

Source: ImmunoGen.

For starters, ImmunoGen is losing money, and with the exception of the occasional royalty payment it isn't expected to be profitable until later this decade. What this means for investors is that ImmunoGen will need some degree of success from its pipeline in order to generate milestone revenue, otherwise it could seek to sell common stock in the future to generate cash.

Another point to remember is that a good chunk of ImmunoGen's value is tied to its in-house products. Because it nets 100% of revenue on in-house products as opposed to a small percentage of revenue for collaborative products, any failure or setback for in-house drugs could sting long-term shareholders. This was the case in Nov. 2013 when it discontinued a phase 2 study involving IMGN901, an in-house ADC targeting CD56 for patients with small-cell lung cancer, following a recommendation from the trial's independent data monitoring committee.

A small-cap worth consideringEven with a fresh trial failure or two in the minds of investors, I still believe ImmunoGen presents an intriguing risk-versus-reward profile. Its non-dilutive royalty deal with TPG gives the company a healthy cash runway, and its deep pipeline gives the company ample chances at long-term success. If you're an investor with a high tolerance for risk and you'd like exposure to the biotech sector, I'd suggest you dig more deeply into ImmunoGen as you might like what you find.

The article 1 Small-Cap Biotech Stock to Buy and Hold For the Next 10 Years originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends ImmunoGen and Seattle Genetics. 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.

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