10 Biotech Stocks With Big Potential Upside In 2012: Part One

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 |  Includes: ACHN, ACUR, AMRN, CLDX, JAZZ
by: Brian Nichols

If you're looking for a stock that could double over the next 12 months, your best bet is biotechnology. Using the Google (NASDAQ:GOOG) screener, I found that 51 stocks with a market capitalization greater than $50 million had returned one-year gains of at least 100%. But what's even more interesting is that biotechnology stocks account for 18 or 35% of the 51 stocks trading with at least a 100% gain over the last year. The top 5 gainers in the market, over the last year, are biotech stocks, and 9 of the top 20 were biotech. Therefore, it's safe to say that if you're looking for a stock with quick upside potential, biotechnology should be the first place you look. However, it can be difficult to identify the stocks that have this level of upside potential, which is what this article will attempt to identify.

This article is actually a two part series that will look at 10 stocks in the biotechnology industry that present the most upside potential from its current position. The stocks on this list are numbered from 10-1, with #1 having the most potential based on a number of possible factors, which include: clinical trials, low valuations, and even the likelihood for being acquired. The goal is to find the absolute most undervalued biotech stocks in the market that could very well return gains of more than 100% over the next 52 weeks.

10. Acura Pharmaceuticals (ACUR)

Acura Pharmaceuticals is one of my favorite biotech stocks -- that I believe has multi-billion dollar potential -- but is still a couple years from reaching its full potential. The company is trading with a market cap of just $150 million, which is less than 18x earnings. The company has an approved technology, AVERSION, which is a deterrent that discourages the common methods of prescription abuse in narcotics. The patented technology has been approved in the drug Oxecta, which is going to be marketed, sold, and manufactured by Pfizer (PFE).

Oxecta is an oxycodone based opiate pain reliever that uses the AVERSION technology to discourage the common methods of abuse. Pfizer's already announced that Oxecta is commercially available, which should have caused a mass reaction in shares of ACUR, but so far the stock's traded with very little movement. Acura receives milestone payments for allowing Pfizer to use the technology, and royalties in the amount of 5% - 25% of total sales. This means that ACUR has all the luxuries of owning a breakthrough technology without the hassles and expenses of trying to market, sale, and manufacture the approved drug; it simply sits back and receives payment.

Oxecta is just the first in a long line of drugs that Pfizer plans to use with the AVERSION technology. There is also a drug that is yet to be approved, with hydrocodone (the most prescribed drug in the U.S.). The future looks bright for this company, and it's in a situation with a technology that has little costs and high profits. It will take time for Pfizer to effectively market Oxecta, but I believe it will change the way physicians prescribe narcotics, and once a hydrocodone-based drug is created, with the AVERSION technology, I think drugs such as Vicodin and Percocet will become extinct. As of now, ACUR is one of the best kept secrets in the market, but I believe that in the second half of 2012 optimism will start to build and its stock will rise, very fast.

9. Amarin Corporation (AMRN)

I simply do not like speculative biotech companies trading with billion dollar valuations; that are yet to receive an FDA approval, however, it's very difficult to deny the potential of Amarin's lead candidate AMR101, if it reaches just half of its full potential. The company's lead candidate AMR101 will be used to treat high triglycerides to prevent cardiovascular disease, among other preventable diseases. The potential for this drug led to a great deal of optimism surrounding the company, which includes a 1,200% gain from January 2010, till May 2011. However, after a failed attempt to obtain a patent along with profit taking the stock has lost 60% of its value from 52-week highs, which is now presenting a good opportunity for value investors.

Despite its recent pullback from 52-week highs the stock is trading with a 600% gain over the last 2 years. The strong gains are a result of two very encouraging phase III trials: ANCHOR & MARINE. Together the two trials allow the drug to treat two ranges of high triglycerides with the potential for 40 million patients treated with the drug. I think that as the company's FDA date approaches, and investors who took profits begin to buyback shares, the stock will rise; and I look for gains of more than 100% over the next 52 weeks in a stock that has great potential as a long-term investment.

8. Jazz Pharmaceuticals (JAZZ)

To suggest that a $2 billion company that is priced at $50 a share will double over the next year may sound somewhat insane, but to me it sounds like a guarantee if we're talking about Jazz Pharmaceuticals. JAZZ is one of the fastest growing biotech companies in the market with earnings growth of 150% year over year. The company's led by its two FDA approved drugs: Xyrem and Luvox. Xyrem treats Narcolepsy and is the company's catalyst for growth; it posted a 68% year-over-year growth during its last quarter with $62.5 million. And Luvox, which treats OCD, returned $9.6 million during its last quarter, a 46% gain compared with the year prior.

The strong growth of JAZZ has never been denied, with it returning 5,000% over the last 3 years, but some investors wonder what catalysts can drive the company to a higher level. The last three years have been great but I believe that 2012 will be a breakout year for the company. The company's two drugs are expected to continue with fast-growing sales, but more importantly, the growth will now come from other sources, such as its takeover of Azur Pharma. The takeover of Azur Pharma is expected to return an additional $100 million of revenue, strengthen the company's already diversified pipeline, and gives JAZZ an international platform to expand its sales. I think that with a larger platform and a pipeline with several late-stage candidates optimism will continue to build; and that JAZZ will never come close to trading near its 12x future earnings. I expect JAZZ to trade at over 25x earnings throughout 2012, which would be a gain of more than 100%, and probably more since the company always exceeds analysts expectations.

7. Achillion Pharmaceuticals (ACHN)

Achillion is an odd play because it has both the most upside and the most downside of any stock on this list. The company's developing and testing its hepatitis C treating drug, ACH-1625, which is currently in phase II. The results of initial testing have consisted of ups and downs, but after many years and a long process, ACH-1625, appears to be on the right track for an FDA approval.

The upside in shares of ACHN comes from two places: encouraging data from trials and its likelihood of being acquired. In my opinion, ACHN has a very high chance of being acquired in the next 6 months. Both Pharmasset (VRUS) and Inhibitex (NASDAQ:INHX) were acquired over the last 5 months with insanely large premiums. VRUS was purchased at a 81% premium and INHX for a 182% premium. ACHN is perhaps the most speculative, but it could also be purchased the cheapest.

The stock's recently pulled back after a downgrade and is trading much lower over the last couple weeks. The stock's trend reminds me so much of INHX; the month following the VRUS acquisition when INHX traded higher by nearly 300%. But then after the one-month gain, INHX lost its momentum and traded lower by 40% before being acquired with a 182% premium. INHX traded higher after the VRUS purchase because investors thought it would also be acquired, because of its hepatitis C candidate. ACHN is following the same trend, from November 12 till January 13 the stock more than doubled, but has since retraced.

At $10 I think ACHN is a buy, it does have a good HCV candidate, and I believe that big pharma will bid to acquire ACHN in the near future. However, the risk in ACHN is if the company's not acquired, then it could have significant loss over the next year. But in a competitive biotechnology industry I believe the reward is worth the risk, and that a large pharma company will take the chance and purchase ACHN in an attempt to stay competitive and capitalize on the trend of investors being bullish on HCV treating drugs.

6. Celldex (CLDX)

Celldex, is the first, of several companies that focus on immunotherapy treatments to make this list. I am particularly bullish on immunotherapy, because I believe that immunotherapy candidates will become the trend in 2012 with several companies releasing impressive late trial results. I think there are several companies that could be acquired in 2012, and I think that multiple stocks within the immunotherapy scope of treatment will trade with gains of more than 100% in 2012. Therefore, Celldex is the first of many in this category that I expect to post large gains in 2012.

Celldex is trading with significant optimism, returning a YTD gain of 100%, as investors await data from its clinical trials. The company has two drugs in late stage testing; Rindopepimut & CDX-011. Rindopepimut treats one of the most deadly forms of cancer, Glioblastoma, and has shown encouraging data in early testing. One factor that makes Rindopepimut so appealing is that it's being used to treat both Frontline and Recurrent glioblastoma, and because of the difficulty involved in creating an effective drug to treat glioblastoma investors are extremely optimistic of its potential. CDX-011 treats one of the most common forms of cancer, breast cancer, which has returned very encouraging data as well. I believe the optimism, and positive data surrounding both of the company's lead candidates is enough to entice a solid uptrend in shares of Celldex. And if trials continue to show strong results then this stock could very well become the next multi-billion dollar company in late stage biotechnology with the potential for two blockbuster drugs, which is very exciting for biotechnology investors.

Biotechnology is a much-diversified industry with companies that treat a variety of diseases and have significant upside potential. My favorite class of drugs is immunotherapy, but as you can see I have listed a variety of companies that treat multiple conditions. I am confident that 2012 will be a year filled with massive returns in biotechnology, and the 5 stocks listed above, are just a few that have significant upside potential. I believe that each of the stocks on this list has upside of at least 100% over the next year, from its current valuation, and next week I will release the top 5 that have the greatest upside potential based on growth, speculation, clinical trials, and current valuation.

Disclosure: I am long JAZZ, CLDX.