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Float Your Boat in a Biotech Moat

This column was originally published on RealMoney on Aug. 1 at 11:40 a.m. EDT. It's being republished as a bonus for readers.

We're all looking for companies that can exhibit phenomenal long-term growth while maintaining high profitability. Trouble is, that isn't easy, especially in technology. The majority of tech companies are like professional athletes: extremely prolific, but only for short periods of time.

Long-term profit generation and stock appreciation depend on margin sustainability, and the only way to maintain margins is high barriers to entry for competitors. But technology is always changing and competition is intense, so it's unusual to find a technology in which the barriers to entry are high enough to prevent competition from eroding margins -- or a new technology from completely supplanting it.

In the past, the most reliably profitable companies were pharmaceuticals, where drugs were protected by patent. That's changing quickly as development costs are exploding and generic competition intensifying. The next most impressive profit generators are anticompetitive monopolies like Microsoft or Intel. We are slowly legislating away those situations.

That leaves us looking for great innovators with new technology, maybe a touch of prohibitive patent protection, some impressive execution, and maybe just a little undisclosed technological know-how for some breathing room. Let's examine two next-generation technology companies, Crucell (CRXL) and Given Imaging (GIVN), that may have the moats to float our financial boats.

Crucell is a Dutch biotech company that develops vaccines and antibodies based on its proprietary human cell line, PER.C6. Until recently, it was more of a development-stage company with several internal vaccine development programs and an impressive list of partnerships with top-line big pharma and biotech companies like Merck, GlaxoSmithKline and Chiron, now part of Novartis. Its recent acquisition of Swiss vaccine company Berna Biotech makes it a full-fledged vaccine provider.

The reason this company offers a significant long-term opportunity is its immortal self-replicating human cell line, which is a cell culture that will grow indefinitely given the appropriate medium and conditions. PER.C6 can be used for the discovery and manufacture of vaccines and antibodies, and it is the reason much larger companies have taken notice and forged partnerships with the company.

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