3 Beaten-Down Biotech Stocks That Could Double

StreetAuthority Network

Officers and directors of the nation's smallest and youngest biotech companies can look up their stock quotes once again.

Stocks in the sector were in such rapid freefall a few months ago that a glance at the stock price chart became too painful to bear.

How painful was the sell-off? 

I counted 30 biotech stocks that shed at least 40% of their value in the past three months, with half of them plunging by more than 50%.

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Yet it appears as if the worst of the storm has passed. Dicerna Pharmaceuticals (Nasdaq: DRNA), for example, which has lost two-thirds of its value this year, is up roughly 5% since April 20. Most other stumbling biotechs have also stabilized in the past month or so.

Of course, such sell-offs don't necessarily invite buying opportunities. Instead, it is wiser to focus on the soundest business models, even if they are only off 25% or 35% in this recent pullback.

I've been spending time the past few days with the most promising biotechs. I favor those with good science, strong testing data, potentially large market opportunities and healthy cash balances. Here's a short list of biotech companies that have potentially 100% upside from here.

1. Verastem (Nasdaq: VSTM)
Cash: $114 million  
Annualized cash burn: $52 million

Although science has made great strides in the battle against cancer, there are still too many instances of recurring tumors, as the core cells that underlie tumors aren't fully eradicated. These cancer stem cells are hard to spot, though Verastem may be on the path to a solution. Its lead drug, VS-6063, is nearing the end of Phase II clinical trials to treat mesothelioma, while a half-dozen trials involving that and two other drugs are in earlier testing stages.

As with any good biotech, this one has catalysts in place for share price movement. Cantor Fitzgerald's Maar Goldstein thinks "2014 will be a year of meaningful data flow that could drive share price appreciation. This year should bring larger milestone flow versus the prior year, including interim data readouts from (four different clinical trials)." Her $22 target price represents 120% upside from current levels.

Insiders have also been supportive of the stock. Since May 13, six of them acquired a collective 7,000 shares. That follows an aggressive slate of insider buying throughout 2013. ​

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2. Versartis (Nasdaq: VSAR)
Cash: $205 million
Annualized cash burn: $30 million

The human growth hormone (HGH) market now totals $3 billion worldwide annually. HGH may be synonymous with professional athletes looking to pump up their biceps, but it has legitimate medical uses in the treatment of growth hormone deficiency (GHD), which can lead to stunted pediatric development. 

Yet HGH has one key drawback: It must be administered daily through an injection. Versartis' VRS-317 requires administration just once a month. According to the company, 46% of patients miss at least two doses per week, which can sharply reduce the efficacy of HGH therapy. Current HGH drugs are produced by eight different vendors: Pfizer (NYSE: PFEand Novo Nordisk (NYSE: NVO), which currently control half the market. Thus far in clinical trials, VRS-317 has produced the same results as existing drugs, without the frequency of doses that they require. 

Analysts at Citigroup say that doctors "expect broad enthusiasm for less frequent dosing. If '317 continues to show comparable efficacy and clean safety, we expect the therapy to shake up the global market (for HGH)." Those analysts have a $60 price target, equaling 120% upside.

Here's the challenge: VRS-317 is still in Phase II clinical trials, meaning it's at least three or four years away from reaching the market. The only near-term catalyst for the stock is the continued release of clinical trial data. Management expects to provide a six-month update for VRS-317 in Phase II in the next few months. The good news: This drug needs only to prove itself comparable to existing treatments, not superior, to pass muster with the FDA, which clearly understands the benefits of reduced dosing.

 

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3. Threshold Pharma (Nasdaq: THLD)
Cash: $86 million
​Annualized cash burn: $34 million​

Talk about imminent catalysts: This company will be presenting its biotechnology platform to analysts on June 1 at the annual meeting of the American Society of Clinical Oncology (ASCO). Threshold continues to show a great deal of promise in its approach to starving tumors of oxygen.

I first profiled Threshold more than two years ago, though shares are up a mere 3% since then. There's no clear explanation as to why shares haven't advanced, though the company is receiving funding from a key Big Pharma partner, and therefore, does need Wall Street money and the analyst coverage that comes with it. 
 
Yet shares may soon get a lift, and not just from that imminent ASCO presentation. Over the next month or two, Threshold is expected to provide a clinical trial update regarding its treatment of soft tissue sarcomas (STS). If all goes as planned, TH-302 could reach the market by 2016, at which time analysts at MLV Capital project $130 million in sales. Peak sales for this drug could exceed $500 million, which underpins the company's $14.50 price target.

Risks to Consider: These stocks are quite capable of plunging below $1 if their clinical trials don't show continued solid clinical data.

Action to Take --> The risky nature of early and mid-stage biotechs means they should never constitute a large part of your portfolio. But it's clear that such stocks represent some of the most robust upside around -- if their trials succeed. A small position in all three of these swing-for-the-fence stocks may be a prudent approach. 

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