News Analysis date published New: 
Thursday, September 6, 2012 - 13:30
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Thursday, September 6, 2012 - 13:30
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Thursday, September 6, 2012 - 13:30

4 Biotech Stocks Ready to Explode

Thursday, September 6, 2012 - 1:30pm

When it comes to investing biotech stocks, it's wise to focus on companies that have completed much of their drug development work. The closer a company gets to the finish line in the clinical-testing process, the less chance that a drug will fail -- taking the company's stock down sharply.

That's also the logic used by big drug companies. They like to acquire promising young drug developers, but only those that have done much of the heavy lifting to vet a drug's prospects. An acquisition announcement sends stocks skyrocketing, so early investors in those small biotech companies can make a lot of money.

For Instance, I'm a big fan of Celsion (Nasdaq: CLSN), which I recently added to my $100,000 Real-Money Portfolio. But there are also a number of other biotech stocks that hold a considerable amount of promise -- if you are willing to stomach the risk. That's why a basket approach makes sense for this speculative segment, as just one big gainer can make up for the other biotech picks that don't gain traction. So it's wisest to own a mix of biotechs, including those that already have drugs on the market along with those that have yet to get the Food and Drug Administration seal of approval.

Large pharmaceutical companies, while partnering with development stage biotechs, typically seek to acquire companies with drug approval already in hand. Here are four biotech stocks that may soon be in the crosshairs of Big Pharma.

1. Onyx Pharmaceuticals (Nasdaq: ONXX)
For a number of years, Celgene (Nasdaq: CELG) was one of the hottest stocks in this sector, thanks to a strong franchise in the area of multiple myelomas, or blood cancers. The company has parlayed its success into a current $31 billion market value. Some investors say Onyx Pharma, which has seen a string of recent clinical advances, may be "the next Celgene." Notably, the company's current $5 billion market valuation makes it more digestible for a Big Pharma acquirer.

Onyx's most important drug is Nexavar, which has already been approved to treat liver and kidney cancer, and is being tested for broader applications such as thyroid and breast cancer. Bayer is already a key marketing partner with Nexavar and the most logical firm to make an offer for all of Onyx. Onyx has also just begun selling Kyprolis, which is expected to take market share in the multiple myeloma market Celgene currently dominates.

2. Biomarin Pharma (Nasdaq: BMRN)
Big Pharma firms don't like to acquire just a promising drug, they like to acquire broad drug development platforms. They know that if the basic science works in one area, then it could end up serving as the basis for many other drugs that may treat different types of diseases.

This helps explain the appeal of Biomarin, which has been developing a portfolio of genetic disease therapeutics. The company targets treatments for rare diseases, which may yield only a small patient population, but a high level of spending per patient. For example, its Aldurazyme drug targets a global population of just a few thousand people, but is on track to generate roughly $200 million in sales this year, thanks to a $200,000 per patient price tag.

Biomarin now has more than $400 million in annual sales, though this figure could spike sharply if the company's Kuvan drug takes off as the company hopes. This drug treats phenylketonuria, a fairly common metabolic disorder. The key will be whether the longer-term efficacy data (due out in coming months) will convince more doctors to prescribe the drug, and whether Big Pharma will sit up and take note.

3. Exelixis (Nasdaq: EXEL)
By the end of this year, this firm may finally get the FDA green light to market cabozantinib, a drug for thyroid cancers. But that's not why investors are focused on this stock. Instead, it's the drug's testing on prostate cancer, currently in Phase III clinical trials, that holds even greater promise. If successful, Exelixis may be able to target a market exceeding $500 million annually (notably higher than the potential $200 million thyroid opportunity.)

The company is also testing cabozantinib to see whether it is effective in the treatment of kidney, liver, lung and ovarian cancer. Further clinical progress in these areas just might convince a Big Pharma player that this is a drug development platform worth acquiring.

4. Threshold Pharma (Nasdaq: THLD)
I laid out my reasons for why this biotech firm is so appealing back in February and though shares have continued to move well higher since then, they still look like a bargain. More to the point, Threshold's drug development platform, known as TH-302, can be applied to many kinds of tumors, which is just the kind of broad opportunity that Big Pharma looks for.

Threshold already has deep ties to Germany's Merck KgA, which makes that company a logical potential buyer. That relationship may actually keep Threshold from attracting other offers, so it is likely up to Merck KgA to decide whether it's better to pay out big milestone payments to Threshold, or simply write one large check to acquire the company.

Risks to Consider: These stocks have had a nice run in anticipation of even better days ahead -- or an outright buyout -- so they carry a higher-than-usual risk of a pullback if there are clinical setbacks or a buyer fails to emerge.

Action to Take --> As noted earlier, a basket approach to these stocks is prudent to limit company-specific risk. Yet these companies are working at the forefront of cancer research, and their years of hard work and heavy investments could be just starting to pay off.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.