4 Biotech Stocks That Could Pop

When analysts received word on March 30 that Medicare would cover Dendreon's (Nasdaq: DNDN ) pricey drug Provenge, used to treat prostate cancer, shares of the drug maker steadily rose from $35 to $43 in just one month. Many biotech watchers had expected the move and set themselves up for a nice and quick gain. Some analysts even suspect Dendreon will eventually power into the $60s, though profit-taking has pushed the stock back down to $38 for now.

Here's the charm of health care: the Food and Drug Administration (FDA) establishes clear dates for when it will approve or reject a drug or a medical device. If you have a clear sense of the odds and can stomach a high degree of risk, then investing ahead of such dates can be wise -- and profitable.

I've just found four biotech companies that could get a boost from FDA-related or other catalysts in 2011. Here they are…

1. Exelixis (Nasdaq: EXEL )

This drug-development company will go before the FDA later this year and throughout 2012 and 2013 with a series of new drug applications. Exelixis' drug cabozantinib, code-named XL1-84, has shown a great deal of promise with a range of metastasizing tumors. The drug is being tested in the treatment of several types of cancers, hence the multiple filings with the federal regulator.

But a much closer catalyst exists: at the annual American Society of Clinical Oncology meeting, to be held in early June, Elexilis will present data from the phase II trial of cabozantinib. If history is any guide, then the interim testing results will be well-received by shareholders.

During the second half of 2011, the drug will go deeper into the clinical testing trials. Each time that happens, the company will provide effectiveness data on the performance of the prior round of testing. Results from a phase III study of metastasized thyroid cancers are expected to be concluded in a few months, while phase III studies for the treatment of prostate cancer are expected to begin later this year. Every one of these instances could be a catalyst to take shares higher.

As a final catalyst, Exelixis has allegedly been having discussions with potential buyers, according to Bloomberg, though waiting on such a transaction before making a move also represents risk. Investors bid up shares of Savient Pharma (Nasdaq: SVNT ) after the company put itself up for sale. Hopes for a quick profit were dashed when the company couldn't find any suitors and shares lost almost half of their value in just one day.

2. Celsion Pharma (Nasdaq: CLSN )

This is another play on clinical trial progress as a catalyst for higher share prices. This micro-cap stock uses heat-sensitive nano-particles to precisely place cancer-treatment drugs within specific tumors. A number of approaches are currently being tested. The first approach uses its ThermoDox technology in conjunction with radio frequency (RF) ablation for primary liver cancer. ThermoDox is being evaluated under a special protocol assessment with the FDA in a pivotal 600-patient Phase III trial. Results from this study are expected to be released in the next few months.

Celsion shares weakened in the first quarter, as the company has sold new stock on a pair of occasions to keep the balance sheet healthy. Further equity offerings appear likely, but with positive feedback from the FDA, shares could pop nicely higher before that happens.

3 & 4: The two sales-force plays

I'm adding two other companies to this list, simply because they lack the ability to sell their drug as skillfully as a large firm. I have mentioned Savient before, which has already received FDA approval for its highly-effective gout drug. The company hoped to fetch $15 per share or more from a buyer, but left the dance alone.

Sales of Savient's Krystexxa gout drug have been OK in the past few quarters and management has done a solid job of building a sales force, but there's no question Krystexxa would be a better-selling drug in the hands of one of the Big Pharma companies. That hoped-for $25-a-share acquisition is likely to never happen, but a buyout in the area of $15 a share is conceivable, which is well above the company's current $8.50 share price. In the absence of a buyer, shares look attractive on a standalone basis.

AMAG Pharma (Nasdaq: AMAG ) is also being hampered by a too-small sales force. The company helps patients with chronic kidney disease to boost their levels of iron. In the first quarter, AMAG's Ferahame drug saw sales of just $11 million, below expectations of $15 million. AMAG has also been beset by manufacturing issues and by the FDA's more restrictive label requirements.

The time appears at hand to let a larger management team come in and fix this quasi-broken business. Any suitor wouldn't have to pay too much, as the company's $272 million in cash already accounts for much of the company's $350 million market value . Making an offer of $500 million, more than 40% above the current share price, still implies a technology value of just $225 million. That's not a bad price for a drug that may hit $200 million in annual sales, according to investment firm McNicoll, Lewis & Vlak.

Action to Take --> Biotech stocks are inherently risky and require a lot of background reading to get comfortable with the investment thesis behind them. Each of these stocks, however, could turn a quick profit for investors if any of the events described above occurs.

Disclosure: David Sterman does not own shares of any security
mentioned in this article.

-- David Sterman

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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