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With the knowledge that the lion’s share of all potential drugs will fail, investing in the biotech sector can sometimes be compared to high stakes gambling. With that in mind, today we take a look at six potentially undervalued biotech stocks.

Oncothyreon Inc. (ONTY): This clinical-stage biopharmaceutical company focuses on the development of products for the treatment of cancer. Its primary product, Stimuvax is in Phase III clinical trials for the treatment of non-small cell lung cancer. Shares traded up 0.24% to $8.34 at the time of writing, off their 52 week high of $11.59.

ONTY’s cancer vaccines are designed to stimulate the immune system to attack cancer cells, while its small molecule compounds are designed to inhibit the activity of specific cancer-related proteins. ONTY's most promising product candidate is Stimuvax, a cancer vaccine in phase III development for non-small cell lung cancer.

Under its license agreement with Merck (MRK) KGaA for Stimuvax, Merck is entirely responsible for the development, manufacture and commercialization of Stimuvax. Future payments, including royalties to ONTY, will depend on the extent to which Merck advances Stimuvax through development and commercialization.

With all its chips riding on one product, and with operating losses for 10 years running, ONTY is a play for the investor that likes to roll the dice. Fundamentally, I would avoid ONTY, but on the outside chance that Stimuvax makes it through phase III trials, perhaps a few shares may deserve a place in your portfolio.

Amgen, Inc. (AMGN): A biotechnology medicines company, AMGN develops and markets human therapeutics based on advances in cellular and molecular biology for a variety of illnesses primarily in the U.S., Europe, and Canada. Shares were down 0.60 % to $54.57 at the time of writing, and also down from its 52 week high of $61.53. In addition, AMGN trades below its peers with a P/E ratio of 11.3.

AMGN markets five of the world's best-selling biotech drugs, and its Denosumab is being explored for bone metastases prevention in prostate cancer patients. A study for this use yielded positive results in December 2010, and the company expects to file for regulatory approval of the drug use by the end of 2011.

AMGN has a strong product core that should produce good cash flow going forward and its current pipeline has the potential to advance its competitive position. Despite the possibility of near term difficulties as a result of U.S. health care reform, and the ever present threat of increased competition in its areas of strength, AMGN looks to be in a position to deliver superior returns over the next 12 months. I like this stock.

Gilead Sciences, Inc. (GILD): GILD is involved in the discovery, development, and commercialization of therapeutics for the treatment of life threatening diseases throughout the world. Shares were up a fraction, to $42.68 at the time of writing, slightly off its 52 week high of $43.49. GILD trades at a P/E ratio of 13.4.

GILD’s primary product portfolio includes: Atripla, Truvada, Viread and Emtriva for the treatment of human immunodeficiency virus infection and Hepsera and Viread for the treatment of hepatitis B.

In the first quarter, GILD’s revenue performance was lackluster as a result of the weak performance of its antiviral (HIV) franchise and lower royalties from Roche on Tamiflu sales. However, GILD holds a dominant share of the U.S. HIV drug market, with an 86% share of all new HIV patients. In addition, I believe that GILD’s next-generation combination HIV drugs have the potential to extend its market-leading HIV franchise.

GILD is branching out in an attempt to aggressively advance its pipeline for hepatitis C, and if the company is able to maintain its product portfolio as older products lose patent protection, the stock looks like a good buy for future returns.

Biogen Idec Inc. (BIIB): BIIB makes and markets therapeutics in the areas of neurology, immunology, hemophilia and oncology in the U.S. and internationally. Shares were up 1.25% to $105.24 at the time of writing, down a bit from its YTD high of $109.63. BIIB trades at a P/E ratio of 24.2.

In the second quarter, BIIB’s net income fell 1.8% to $288 million, from $293.4 a year earlier. In addition, revenue slipped 0.3% to $1.21 billion from the year earlier quarter.

BIIB reported higher-than-expected sales of its multiple sclerosis drug Tysabri in the second quarter, as the net number of new users grew at the highest rate in more than a year, but the drug faces increasing competition from new products entering the market. In an effort to combat the potential competition, BIIB is developing its own oral multiple sclerosis drug, BG-12, which, if approved, could make the company a leader in the oral MS drug market.

I expect BIIB to produce revenue and earnings growth in the coming quarters with new products from its core multiple sclerosis franchise. However, with no “blockbuster” type product in the pipeline or on the horizon, I believe that BIIB will perform in line with the overall market over the next few quarters.

Dendredon Corp. (DNDN): engages in the discovery, development and commercialization of therapeutics to enhance cancer treatment options for patients. Shares were down 0.91% to $37.96 at the time of writing, down from its April 29 YTD high of $43.43.

For DNDN, the story is simple. Commercialize Provenge, the company’s immunotherapy for the treatment of prostate cancer.

Recently, the company announced that the Centers for Medicare and Medicaid Services (CMS) agreed to fully reimburse Provenge. I believe that reimbursement of the vaccine by Medicare is vital for the success of the drug, as it is primarily used in men older than 60, who are dependent on Medicare for their treatment. Also encouraging is the company’s decision to expand production.

DNDN probably cannot survive without the successful commercialization of Provenge, as it has the potential to drive the company to profitability. Despite my reservations about the company’s complete dependence on Provenge and its lack of a product pipeline, I like DNDN for growth in the near term, as sales begin to ramp up, increasing profitability.

Vanda Pharmaceuticals, Inc. (VNDA): VNDA focuses on the development and commercialization of products for the treatment of central nervous system disorders. Shares were up 0.42% to $7.16 at the time of writing, down sharply from its 52 week high of $10.32. VNDA has a P/E ratio of 30.4, significantly higher than its closest competitors.

The company’s product portfolio includes Fanapt (iloperidone), a compound for the treatment of schizophrenia, which the company is developing both the oral and injectible form. VNDA’s other product candidate is Tasimelteon, a compound for the treatment of sleep and mood disorders, including Circadian Rhythm Sleep Disorders.

In the first quarter, royalties from Fanapt were just $0.9 million, down sharply from $2.1 million a year earlier. With its thin product pipeline and its inability to generate significant revenues from its primary offering, I believe that VNDA will underperform in the near term.

Source: 6 Deeply Undervalued Biotech Stocks