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In part one of this series, we looked at five stocks that each had the potential to double in 2012, based on low valuations and upcoming developments. In part one we discussed numbers 6-10, which is based on my level of confidence that each stock will double. In part two we are looking at numbers 5, 4, and 3, meaning I believe that the following three stocks are more likely to double compared with the stocks in part one. And although I anticipate large gains in every stock on this list I believe that because of low valuations, encouraging developments, and increased optimism that each of the stocks in part two are presenting a level of upside that's unseen with any of the stocks in part one.

In part one I mentioned that immunotherapy based drugs, and companies, are my favorite in biotechnology. Immunotherapy is being used to treat a variety of cancers, and so far, is showing multiple advantages to the conventional methods that were used in the past.

Unfortunately, we've already exhausted our ability to treat cancer via chemotherapy and radiation therapy, and monoclonal antibodies have advanced the field but are not the cornerstone of treating cancer that we once thought.

I believe that immunotherapy is the next frontier in treating various forms of cancer; a disease that has seen little improvements in survival over the last 30 years. However, because of new research we now have a broader knowledge of the immune system and how it can work to treat various forms of cancer, with immunotherapy. Immunotherapy is showing the ability to re-program the immune system and identify micro and malignant tumors as being foreign. We all have micro-tumors in our body, which are controlled by our immune system, but when a dysfunction occurs these micro-tumors grow into malignant tumors. And the early data surrounding immunotherapy is showing that treatment can not only identify these tumors but can treat individual tumors without causing any, or limited, damage to normal cells.

There's a significant distinction in value between companies that focus on immunotherapy, and I've noticed, that several of these companies with the best data are trading with the lowest valuations. It appears that immunotherapy stocks are being overlooked, and with so many being close to an FDA approval, with flawless data, it's presenting a perfect opportunity to return large gains, of much more than 100% over the next 52 weeks. Below are three of the more undervalued immunotherapy stocks presenting this level of potential.

Oncothyreon (ONTY)

Oncothyreon has returned gains of 180% over the last year. The stock trades with the highest market capitalization of the speculative immunotherapy-based companies, and I believe its gains are just getting started. The company's lead candidate is an immunotherapy-based treatment, Stimuvax, which has shown very encouraging data in the treatment of non-small lung cancer. The stocks returned 25% over the last two weeks, as investors anxiously await the interim data from its clinical trials. Stimuvax is currently in two pivotal phase III trials: START & INSPIRE. The START trial is for patients with stage III non-small cell lung cancer; while the INSPIRE trial tests the drug in Asian NSCLC patients.

I am confident that both the START & INSPIRE trials of Stimuvax will create an optimistic reaction among investors once the results are released. During its phase II trial the goal was to test the safety and the survival rates of patients, and the results were significantly optimistic. Results from the phase 2B trials showed that the median life expectancy of patients with stage IIIB NSCLC more than doubled compared with standard care alone. The company's phase-three trials will further test the efficiency of Stimuvax, and I have no reason to believe the results will be anything less than encouraging. I believe both trials will provide even more data to suggest that Stimuvax stimulates the immune system, recognizes cancer cells, and controls the growth and spread of other cancers. Oncothyreon trades with the highest valuation of the immunotherapy stocks on this list, and I believe its trial results will be a large driving force behind further gains and potential acquisitions over the next year for companies with similar technology.

Vical Incorporated (VICL)

Vical Incorporated is a popular investment in the class of immunotherapy with a very promising candidate. The company's lead candidate, Allovectin, is currently in its phase III trial and could hit the market sometime in 2013, if approved. All evidence suggests that Allovectin will be approved with results that show the drug successfully increases the survival rate of patients with melanoma.

Melanoma is a form of skin cancer with approximately 70,000 new cases per year, and 9,000 deaths. If approved, the company projects between $500 million and $1 billion in annual sales from Allovectin. Some investors have shown concern regarding Allovectin's likelihood for approval and its ability to successfully capitalize on its large market because of high costs associated with the manufacturing and sale of the drug. These concerns are appropriate, because there are several other pipeline drugs from various biotechnology companies that treat the same disease; and it will cost a significant amount to manufacture the drug. However, Allovectin, like most immunotherapy drugs, has shown very strong results in early testing, and if its phase III trial is successful then it could become the leading product in treating melanoma. Investors should rest assured that the company has the ability to successfully market, manufacture, and sell the drug with remarkable facilities, $50 million in cash, and a very large and diversified pipeline to promote future growth beyond Allovectin.

Vical trades with a market cap of $251 million and has posted a one-year gain of 75%. However, the stock has traded with a YTD loss of 25%, which was initiated when the company proposed a public offering. And for a company that's running two phase three trials, with early testing that's been successful, the stock is trading considerably cheap; especially since it could hit the market in just one year.

I am surprised that VICL isn't trading as a momentum stock, because Allovectin will be a first-line treatment for Stage III & IV melanoma. It's already shown advantages over current first-line treatments, which include: improved efficiency, better safety profile, and it can be administered as a simple outpatient procedure. At this point I see limited downside but substantial upside as 2012 should be a big year for investors of VICL.

Galena Biopharma (GALE)

A couple weeks ago I wrote an article that discussed illogical valuations in biotechnology. The article focused on Galena Biopharma as one of the better small biotech companies with encouraging data surrounding its lead candidate, NeuVax. The company's lead candidate, Neuvax, treats breast cancer in patients that are HER2 positive. The drug forces the body's immune system to respond and work more efficiently, then it specifically targets cancerous cells without affecting normal cells. The treatment has been proven safe and well tolerated, and has initiated its phase III trial, ahead of schedule, which will test the drug's efficiency on 700 patients. The company trades with a valuation of $44 million after a YTD gain of 121%, following successful trial results and optimism that NeuVax will be successful in fighting breast cancer.

Excluding cancers of the skin, breast cancer is the most diagnosed cancer in women with an estimated 227,000 new cases in 2012. The mortality rates of breast cancer have significantly increased over the last 10 years with 40,000 expected in 2012, or 18% of new cases. The deaths associated with breast cancer are often a result of the spread of cancer to other areas of the body. Therefore, a drug such as NeuVax, which targets a specific area, is very important to the containment of the disease. This fact is why I am so optimistic and believe it's presenting great upside with a valuation under $50 million.

GALE is a stock that I could have easily chosen as number one, and if you compare its value with its potential then there is no other biotech stock that comes close, over a period of several years. NeuVax is sometimes compared with Genetech's Herceptin, which treats 25% of breast cancer patients and returns $5 billion in annual sales. However, NeuVax doesn't directly compete with Herceptin, but rather targets an additional 50% of breast cancer patients that are HER2 positive. It's difficult to predict NeuVax's potential sales, however we can speculate that if Herceptin returns $5 billion and only targets 25% of patients then NeuVax could have the potential for billions in annual sales.

Some investors express concerns over NeuVax's likelihood to be awarded an approval. Its phase III trials consist of 700 patients, and the company will also administer another phase III trial in the near future. NeuVax is yet to be tested with this number of patients, but all testing to this point has been positive, including its phase II trials, which identified the drug as safe and well-tolerated. In fact, the only significant data regarding its potential in phase III was provided by the Brook Army Medical Center. In a study published in O, the Oprah Magazine, NeuVax was tested on women who were HER2 positive, at Brook Army Medical Center, and after 2 1/2 years the vaccinated group had a lower risk of recurrence and was twice as likely to survive. If phase III shows similar data, then the upside potential for this $50 million company is unprecedented, and as the year progresses I believe that speculation and updates from phase III will result in optimism among investors and GALE will trade significantly higher.

In part two of this series we've looked at three speculative companies with immunotherapy treatments that have shown promising data. I believe that each of these companies is significantly undervalued and present the likelihood for very large gains throughout 2012, with major announcements expected. It will be interesting to watch these stocks throughout 2012, and even further into the next several years, as the catalysts for growth begin to develop and each stock appreciates with transcendent technology in treating the devastating disease of cancer.

Source: 10 Biotech Stocks With Big Potential Upside In 2012: Part Two