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Biotech investing can be full of risks, but it can also be extremely rewarding. It's possible to take a relatively small sum of money and turn it into a life-changing sum, if you pick the right stocks. It's also possible to lose a lot of money very quickly when a company reports bad news on clinical trials or negative FDA decisions. That is why it makes sense to take smaller positions in higher risk biotech stocks, especially since even a small $5,000 or $10,000 stake could turn into $50,000, or $100,000, or more, if things go well. There have been numerous biotech stocks that have become 10-baggers in just a short time period. Those tend to be the stocks that have been left for dead and trading for a buck or two.

On the other end of the spectrum are the more established biotech companies with cash-rich balance sheets, multiple products already producing revenues, and even profitability. These won't offer the upside of a $1 biotech stock that announces positive clinical data or FDA approval, but these are also less likely to plunge if there is a setback. Below, there are a couple of higher-risk, high reward stocks to consider and a couple of more established biotech stocks that may off less upside in exchange for less downside. All of these picks appear to have high potential and upside catalysts that could push these stocks significantly higher in 2013. Let's start with the two less speculative picks, and then move on to the two higher-risk, higher reward stocks next:

Gilead Sciences (GILD) is a top choice for many biotech investors because this company has a history of success and profitability. The stock has also been in an uptrend which looks poised to continue for a number of reasons. First of all, this company has an impressive revenue base from existing products and it has a compelling pipeline as well.

Gilead recently submitted a new drug application or "NDA" to the Food and Drug Administration in a request for approval to market its hepatitis C virus candidate, which is called "Sofosbuvir" (formerly GS-7977). Because many people suffer from this disease all over the world, hepatitis C treatments have the potential for blockbuster level status which is achieved when a drug exceeds $1 billion. The data for "Sofosbuvir" looks promising as it was achieving superior results when compared to other similar hepatitis treatments. "Sofosbuvir" appears to offer a shorter treatment times and fewer side effects. If this candidate is approved, it is likely to generate a significant new source of revenues for Gilead.

Gilead has focused on treatments for HIV/AIDS, liver disease as well as for cardiovascular and respiratory conditions. It has a significant number of products which are currently approved and on the market. This includes a treatment for HIV infection in a once-daily single pill called "Atripla". A treatment called "Truvada" for HIV prevention in uninfected adults, which are at high risk. It also has "Complera" which is another HIV treatment, "Hepsera" for the treatment of chronic HBV infection (liver disease), "Tamiflu" (or oseltamivir phosphate), for the treatment and prevention of influenza A and B. Plus, it has other treatments for cardiovascular and respiratory diseases.

Gilead Sciences has been reporting solid financial results and revenue growth. Total revenues for the fourth quarter of 2012 jumped 18% to $2.59 billion, from $2.2 billion in 2011. Net income for the fourth quarter of 2012 came in at $762.5 million, or 47 cents per diluted share which compares favorably with net income of $665.1 million, or 43 cents per share in the fourth quarter of 2011. Full year 2012 revenues were $9.70 billion, which resulted in net income of $2.59 billion, or $1.64 per diluted share.

Analysts expect the company to earn $2.02 per share in 2013 and $2.80 for 2014. This puts the price to earnings ratio at a reasonable level when you consider the growth. On April 9, 2013, analysts at RBC Capital Markets reiterated an "outperform" rating and set a $55 price target. If "Sofosbuvir" is approved for hepatitis C, that price target will probably be adjusted much higher. However, because this stock is at the higher end of the recent trading range, patient investors should wait for pullbacks.

BioMarin Pharmaceutical Inc. (BMRN) shares have been trending higher since hitting lows of about $37.50 in November, 2012. With the stock now trading close to $65, it makes sense to wait for pullbacks and buy the dips. This company has a number of products and catalysts that could keep revenue growth rates well above average for years to come and that is why it could continue to trend higher in the long-term.

BioMarin has a number of products which are already out on the market and this includes Naglazyme (MPS-VI), which is expected to generate sales of $265 to $285 million. It also has Aldurazyme (enzyme replacement therapy), Kuvan (phenylketonuria) and Firdapse.

BioMarin's pipeline could present additional upside catalysts for the stock in 2013. This includes "Vimizim" which is designed for patients with mucopolysaccharidosis, which can cause skeletal abnormalities, vision and hearing loss. BioMarin's pipeline includes PEG-PAL or "PEGylated recombinant phenylalanine ammonia lyase" which was developed to treat "phenylketonuria". This is a genetic disorder that can cause mental retardation, seizures and other problems. On April 1, 2013, it filed a clinical trial application for "BMN-190", which is for Batten Disease. There are other promising candidates and the complete pipeline for BioMarin can be viewed here.

BioMarin has been reporting solid results and that is likely to continue. Revenues jumped over 13%, to $500.7 million in 2012, from just $441.4 million in 2011. It also has a strong balance sheet with nearly $567 million in cash, at the end of 2012. Furthermore, the company has given revenue guidance of between $530 to $555 million for 2013.

This stock trades at a valuation of roughly 20 time revenues and that is a downside risk to consider. At current levels, a major disappointment in clinical development or FDA approval could cause a sharp pullback in this stock. However, that could be a buying opportunity for longer-term investors because this company does have a growing revenue base and a cash-rich balance sheet. It also has enough currently approved, revenue generating drugs and pipeline candidates that make it more diversified when compared to many other biotechs. This diversification mitigates downside risks for shareholders.

Catalyst Pharmaceutical Partners, Inc. (CPRX) is a small biotech company that has been developing specialty drugs which target rare neurological diseases and disorders. This stock was trading for over $2 in September 2012, on hopes that it would announce positive data for CPP-109 which it was developing for the treatment of cocaine and methamphetamine addiction, however, the news disappointed investors and the stock has declined. As one recent article on Seeking Alpha states:

"Catalyst was a high flying stock last summer, tripling in price before crashing down on bad trial data news. As we have highlighted in our other articles, biotech stocks that drop on bad news can offer rich upside rewards for investors who buy after the drops have occurred. As is often the case, renewed hope appears or other drugs in the pipeline come to the forefront. The latter is the case with CPRX."

It is true, biotech investors can be a fickle bunch and when the news disappoints, stocks can drop way below any reasonable level of fair value. A number of stocks have experienced a plunge to about $1 or even less, only to rise back to several dollars per share when good news comes out. About a year ago, this happened to Arena Pharmaceuticals (ARNA). That stock plunged to nearly $1 when investors became concerned about FDA approval for its diet drug. However, it later received approval and the stock surged back to about $10. This is one example of how it can really pay off to go against the grain and buy some badly beaten down biotech stocks that still have major upside potential. Catalyst could turn out to be one of those stocks for a number of reasons.

While the news about CPP-109 was disappointing, this company still has a lot to offer. It's important to realize that almost every biotech company experiences setbacks, and this can provide huge buying opportunities to get in cheap, when other investors have lost interest. There are multiple reasons why this biotech stock still offers investors plenty of upside potential:

Reason #1: Catalyst has worldwide rights to commercialize CPP-115 which has been granted orphan drug designation by the FDA for the treatment of infantile spasms and orphan medicinal product designation in the European Union for West's syndrome (another form of infantile spasms). In May 2012, Catalyst announced positive results from this double-blind, placebo-controlled, clinical trial. The company states:

"CPP-115 was well tolerated at all six doses administered in the study; there were no significant adverse events, and no cardiovascular or respiratory events were reported in the study; and CPP-115 was rapidly absorbed (time to peak blood concentration was about 30 minutes). Subject to the availability of funding, Catalyst hopes to begin further human clinical trials evaluating CPP-115 later in 2013. To fund such trials and studies, Catalyst intends to pursue grants from NIH and foundations. In addition, Catalyst hopes to identify a strategic partner to work with it in the development and future commercialization of CPP-115."

Reason #2 (This could be big): Catalyst agreed to a deal with a highly respected biotech company, BioMarin Pharmaceutical for a drug candidate called "Firdapse" that could be a treatment of Lambert-Eaton Myasthenic Syndrome. Catalyst has estimated that Firdapse can achieve peak annual revenues from sales in the United States of approximately $100 million. As part of the deal, BioMarin Pharmaceutical purchased millions of Catalyst shares. The licensing deal and the multi-million investment into Catalyst appears to be a major vote of confidence in Catalyst and its management team. So far, this deal has not seem to have received the attention of the investment community, but that appears to be a mistake. Catalyst states:

"On October 31, 2012, Catalyst announced the in-licensing of Firdapse™ from BioMarin Pharmaceuticals, Inc. Firdapse™ has been granted orphan drug designation by the FDA for the treatment of Lambert-Eaton Myasthenic Syndrome (LEMS), a rare, debilitating and sometimes fatal autoimmune disease with the primary symptoms of muscle weakness. It has also received orphan designation and has been approved for marketing in the European Union for the treatment of LEMS."

Catalyst has set forth the following projections for Firdapse:

Q1 2013 -- Report Firdapse Data Monitoring Committee meeting results

Q4 2013 -- Complete enrollment of Firdapse phase III clinical trial

Q2 2014 -- Report top-line results from Firdapse phase III clinical trial

Q1 2015 -- File NDA for Firdapse

If Firdapse is approved and achieves the revenue projections of $100 million per year, that would probably be an exceptionally rewarding catalyst for this stock.

Reason #3: Catalyst has a solid management team and many of its top executives have been buying the stock in the past few months. For example, on February 18, 2013, Patrick Mcenany (an officer), purchased 50,000 shares. In December 2012, he also bought 100,000 shares and then another 100,000 shares in November. In December, 2012, BioMarin Pharmaceuticals purchased 5 million shares. Other insiders also made stock purchases and all of the insider transactions can be seen here. BioMarin Pharmaceuticals now owns about 16% of Catalyst and insiders also have a significant stake.

Reason #4: The company has a solid balance sheet with about $12 million in cash and no debt. It also has a very low burn rate which reduces risks for investors. Based on the revenue potential of $100 million for just Firdapse alone, this stock appears to be significantly undervalued. The licensing deal and investment from BioMarin should be considered as a strong endorsement of Catalyst and its management team. Plus, based on clinical data, the commercialization potential of CPP-115 also appears promising. Catalyst shares seem to have put in a bottom and the stock might be poised for a significant rebound, especially if the company announces positive news or partnership agreements for its pipeline.

Reason #5: Analysts at Zacks Equity Research recently upgraded shares of Catalyst with a "Zacks Rank #1" which is a "strong buy" rating. Even more recently, (on April 18th) analysts at Aegis initiated coverage on Catalyst with a buy and set a $2.50 price target.

Acadia Pharmaceuticals, Inc. (ACAD) is a biopharmaceutical company that is working to develop treatments for neurological and related central nervous system disorders. Acadia's lead candidate is called "Pimavanserin", which is in Phase III development for treatment of Parkinson's disease psychosis. It also is developing Pimavanserin for schizophrenia, and Alzheimer's disease psychosis. It has other candidates in the pipeline such as "Adrenergic" for chronic pain, "Muscarinic" for glaucoma, and others which are in preclinical stages.

The company recently announced it plans to apply for Food and Drug Administration review of Pimavanserin by the end of 2014, and that is sooner than expected. The FDA agreed that Acadia would be able to use trial results and data from other studies which eliminates the time and expense of another final trial. This news caused the stock to surge from about $8, to over $12. In November, this stock was trading for just about $2 and the 52-week low is just $1.29. (This shows how rewarding biotech investing can be when things go well.) According to multiple analysts, even after a huge run, the stock has plenty of upside potential left. On April 11, 2013, analysts at Needham reiterated a buy rating and raised the price target to $16. MLV & Company also reiterated a buy rating and set a $18 price target.

Acadia has a very strong balance sheet with about $108 million in cash and no debt. This significantly reduces downside risks for investors. However, after a run from a 52-week low of $1.29 to over 10 times that amount, if for some reason the FDA approval did not come through, that could create a major decline for these shares.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: These 4 'High-Potential' Biotech Stocks Could Outperform In 2013