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Bad results from drug trials and FDA denials are the two major killers of biotech stock prices and the portfolios of those who invest in them. These sell-offs, however, can prove to be very lucrative to those not in the stock when the crashes occur. Biotech research is very difficult, and oftentimes there are setbacks in drug development. Biotech stocks trade on hope and unless development is totally stopped, there is always room to reinterpret data, run a new trial and seek to get better results in the future. Below are two biotech stocks that have seen their stock prices plunge on bad trial data that could, with the right approach, give investors and traders an opportunity for upside.

As an example of the potential for large gains in biotech stocks that suffer large drops on bad data, we look to Peregrine Pharmaceuticals Inc. (NASDAQ:PPHM). In September of last year Peregrine Pharmaceuticals fell from $5.50 per share to an intraday low of 80c after it announced major discrepancies in its drug trial data. Over the following days, the stock saw its loan called in and quickly saw its cash balance dry up. This biotech was left for the dead. In the coming days the stock traded to a low of 68c, almost a 90% drop. In early January, Peregrine traded at $2.78, and as of today is trading in the low $2 range, a 300% rebound from the September sell-off. So what changed to warrant such a reversal? For one thing, Peregrine completed its review of the drug data and determined not all the data was bad. This is not uncommon with biotech stocks. While bad for those in the stock at the time, these large drops can prove to be very profitable for investors and traders who move in after the drops.

The first bad trial tanker play to look at is Celsion Corp, (NASDAQ:CLSN). In the past few days the stock has plunged from $8.45 to as low as $1.15, an 86% drop. To recap quickly, Celsion announced that ThermoDox® in combination with radiofrequency ablation ((NYSEMKT:RFA)) did not meet the primary endpoint of the Phase III HEAT Study in patients with hepatocellular carcinoma ((NYSE:HCC)), also known as primary liver cancer. Specifically, Celsion has determined, after conferring with its independent Data Monitoring Committee (DMC) that the HEAT Study did not meet the goal of demonstrating persuasive evidence of clinical effectiveness that could form the basis for regulatory approval in the population chosen for study. A positive from the results was that the drug was safe and well tolerated. Now the data mining begins. The company is conducting additional analyses of the data from the trial in order to assess the future strategic value of ThermoDox.

A look at the CLSN pipeline gives hope for those considering the stock after this drop.ThermoDox is also underway in two other trials for breast cancer and for corectal cancer. The DIGNITY Study is a multicenter, single-arm open label, dose-escalating Phase I/Phase II trial of ThermoDox® plus hyperthermia in up to 109 patients with recurrent chest wall (RCW) breast cancer. In 2011, Celsion initiated a Phase II study of ThermoDox® in combination with RFA for the treatment of colorectal liver metastases (The ABLATE Study). Celsion is exploring ThermoDox in combination with high frequency ultrasound (HIFU) as a non-invasive treatment for a variety of cancers. The company has established a joint research collaboration with Phillips Healthcare to evaluate ThermoDox plus HIFU in a clinical study in bone metastases, with pain palliation as the primary endpoint, and with the Focused Ultrasound Foundation, the company is supporting preclinical studies exploring the use of ThermoDox® plus HIFU for the treatment of pancreatic cancer.

Celsion is currently sitting on $27m in cash and financing down the road is likely. However, we need only look to Peregrine to see that sometimes that does not matter. A positive spin on the trial results and the stock will move sharply higher. Should Celsion have risen from $1.65 in June to $8.45 last week? Probably not. Should it now sit here at $1.15 down 86%? Probably not, but again, that is what the market is pricing it as. While it is a long shot that positive news can come of this it is not unheard of, and the risk reward at these prices could be very attractive. It is still early here after the sell-off but those wiling to wait for two to three months could be handsomely rewarded. The company also has an active pipeline to fall back on still. A bounce back to the June 2012 price level of $1.60 would be a 50% gain from here.

The next stock to review is Tranzyme, Inc. (TZYM). 2012 is a year this company wants to forget after suffering not one, but two drug failures in the course of a month. As a result the stock shed 75% of its value. The first piece of bad news came in November when the first of two Phase 2 trials did not meet its primary endpoint. In December the company reported that its was also stopping its Phase IIb trial after finding it too was no better than the placebo. As of today shares of Tranzyme are trading under 60c with an implied market cap of $15m with $20m in cash and no debt. The company's pipeline is comprised of two preclinical stage compounds, TZP-201, a motilin agonist for chemotherapy-induced diarrhea, and TZP-301, a ghrelin antagonist for the treatment of metabolic diseases. Tranzyme's product candidates were discovered using its proprietary chemistry technology platform, MATCH™, which enables the construction of synthetic libraries of drug-like, macrocyclic compounds in a predictable and efficient manner. MATCH™ is a proven technology capable of finding candidate macrocycle molecules independent of target type or disease area. It is this technology that makes Tranzyme an interesting play here. In January they announced the successful completion of a chemistry-based drug discovery collaboration with Bristol-Myers Squibb (NYSE:BMY). As a result of the joint research efforts, Tranzyme transferred compounds to Bristol-Myers Squibb for further development across multiple drug targets. Bristol-Myers Squibb is responsible for completing preclinical and clinical development of all products arising from the collaboration, and for their commercialization globally. Total milestone payments under the agreement, excluding royalties and sales milestones, could reach up to approximately $80 million for each target program. This could prove to be a very lucrative deal for Tranzyme in the coming months and years as new drugs are developed. Each new drug could be worth up to $80m and Tranzyme does not have to spend a dime of its cash developing! A look at the chart here shows a breakout at 61c with an upside potential of 50-75%. Tranzyme has been consolidating for tow months now like Peregrine did and may be ready for its bad news bounce now.

Biotech stocks can carry enormous risk but that risk can be greatly diminished after large sell-offs on bad news. Both Celsion and Tranzyme have seen their share prices punished but for traders and investors looking for a speculative angle in their portfolios the risk reward after such drops could be very nice. Both Celsion and Tranzyme are trading at valuations that suggest the companies have no assets but as we have shown above, they have both cash and a viable pipeline.

Source: Speculative Biotech Stocks That Could Bounce