5 Biotech Stocks With Massive Upside Potential In 2013

| About: Vertex Pharmaceuticals (VRTX)

I have had my eye on Vertex Pharmaceuticals (NASDAQ:VRTX) for awhile now. The stock recently leaped 42% on news of a successful study targeting cystic fibrosis. The combination of Kalydeco and VX-809 was found to have improved the lung function of 46% of patients over a 56 day treatment period.

Despite the recent runup, I still think now is a good time to get in. There are a lot of choices in the hepatitis C industry, but Vertex recently made a huge splash, announcing its hepatitis C drug Incivek was completely successful in its phase two trials. Incivek was given to patients who had never been treated before and who suffered from a specific genotype of the disease. The study showed patients were cured in three months. Vertex continues to test the drug in phase three trials and is also testing it to be used on patients suffering from HIV and hepatitis C. Incivek has already been approved for use, but was used in combination with other hepatitis medications to treat hepatitis C.

Vertex has very specific risks associated with Incivek. First in importance is that the drug is on the FDA's watch list for patients with Eosinophilia and other rare blood conditions. The FDA "[I]s continuing to evaluate this issue to determine the need for any regulatory action." Despite the success of the phase three trials, some are worried about the potential side effects of the drug, which could lead to an increased risk in investing. I believe these risks are mild, considering the drug cures the disease. Temporary bouts of itching, fatigue, vomiting, and diarrhea should be tolerable if it means an absolute cure. I would recommend keeping an eye on the more serious issues associated with Incivek, such as anemia, but overall I do not see the side effects having much of a role in the success of the drug. The FDA has not found any causal links to significant liver or blood cell damage to date.

Vertex jumped about 5% following the announcement of the successful trial. Incivek has a great deal of competition, but it could become the preferred drug in the industry because it works so fast. Patients are looking at about half the treatment time it takes other hepatitis C drugs to work. Incivek is given in two doses per day, one less than usual hepatitis C dosage of three per day. This is not a big deal in terms of success or value, but it is one more positive thing to add to the list of Incivek's beneficial qualities.

The hepatitis C market is filled with contenders, so Incivek needs to continue its strong performance in clinical trials to hold up in the industry. There are two other drugs that might be GILD)+Presents+Encouraging+Interim+Data+from+ATOMIC+of+GS-7977/7356209.html" target="_blank" rel="nofollow">capable of curing hepatitis C including GS-7977, produced by Gilead Sciences (GILD), and ribavirin, produced by Bristol-Myers Squibb (NYSE:BMY). The clinical trials on both drugs showed the cure rate to be more than 85% when both drugs are administered together. Neither appears to be as strong as Incivek, which had a cure rate of 100%. Both are taken orally, like Incivek, moving away from the traditional injection treatment for hepatitis C. For many, Vertex is lagging behind these two companies with Incivek, but I do not believe that to be the case, especially over the long haul. In addition to a potentially better cure rate Incivek is effective taken by itself, whereas ribavirin and GS-7977 work together. The companies have no arrangement to work together, so there is little hope of the magical formula making its way into a single treatment, like Incivek.

In addition to Incivek, Vertex has a fairly strong pipeline. There are three more hepatitis C drugs in the works, as well as two for cystic fibrosis, one for epilepsy, one for influenza, and one for immune-mediated inflammatory disease. One of the cystic fibrosis drugs, VS-809, is an orphan drug that has been fast-tracked. Vertex also has more than a dozen programs focused on developing treatments for cancer, Huntington's Disease, multiple sclerosis, and tuberculosis. This means there are a number of other potential hits laying in wait behind Incivek, making it an even bigger contender.

Two other options that are on my biotech radar right now include Valeant (NYSE:VRX) and VIVUS (NASDAQ:VVUS). Valeant is expanding in the Latin American market and is poised to stay strong in the coming months. Its strategy is to grow not only through its pipeline, but by acquiring other companies and products. Its recently acquired Atlantis Pharma, a Mexican drug manufacturer responsible for generic drugs focused on gastro-intestinal, anti-inflammatory, and analgesic medications. Valeant's goal is to expand into new markets through acquisitions. Valeant saw prices dropping in certain areas and took advantage of the opportunities. It has also taken over a manufacturing facility in Brazil, as well as companies in the US, Russia, Canada, and Australia. The company has specific acquisition-related risk, and it does have $600 million in debt that is equally matched with cash flow from operations. The company, so far, has been able to harvest going-concern manufacturing operations for cash within months if not weeks of the take-over.

Next up is VIVUS. I like VIVUS because it is focused on a strong market that expects to see growth in the future. Its weight loss drug, Qnexa, could make a big splash in the coming months. Once approved, Qnexa will be one of the few solid obesity drugs on the market. Approval is expected in July of this year. Companies have a tough time getting weight loss drugs approved and many of the previous approvals have given the industry a bad name. Qnexa could mean the return of medical solutions to obesity and will certainly have a big enough market to see sustainable earnings. It is likely to be approved in the near future and investors should make a move now to get in before everyone is paying attention. I believe weight loss treatments are poised to make another big splash, but major movement might not come for several more years. The market is there, we just need the products to treat the condition. On a historical basis, the company faces real risk due to the FDA's dearth of approvals in the obesity drug market. Investors should not be naieve, but they should also not adopt an overly simplistic view of the regulatory body. The FDA is equipped to evaluate the drug scientifically without historical burdens from Pondimin and Redux when they were withdrawn from the market in 1997.

I believe any of these investment options are a good bet, but my favorite among those listed right now is Vertex. Anytime a drug completes trial end points with a success rate of 100% is going to garner some attention. If phase three trials of Incivek produce the same positive results, it could surpass Kalydco as the company's flagship drug. With two drugs currently on the market and the goal of developing additional uses for each of the drugs, Vertex is on pace to become one of the heavy hitters in the biotech industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.