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In the first quarter of 2012 the biotechnology sector was thriving, much like the rest of the market. However, biotechnology in particular had stocks that were trading with multi-year gains in a three-month span. With all massive rallies there is always a fall and a period of profit taking that leave some investors, who bought too high, feeling the pain of buying a stock at the height of its rally. Threshold Pharmaceuticals (THLD), Galena Biopharma (GALE), and Orexigen Therapeutics (OREX) are three companies that fall in this category of stocks that posted unprecedented gains in the first quarter but slipped in the second quarter due to profit taking. Over the last month, as the second quarter came to an end, each of these stocks rallied and posted impressive gains. Therefore, let's look at each stock, and each chart to better understand its trading behavior, and what has made each stock trade with such volatility over the last six months.

Threshold Pharmaceuticals began the year with one of the best three-month rallies that I have seen in many years, with a 620% gain. The incredible gains were non-existent in January, but in February the company announced an agreement with Merck KGaA (OTCPK:MKGAF) to co-develop TH-302, an anticancer agent and the company's lead candidate. The agreement created optimism for the drug's likelihood to be approved, and when the company announced that its Phase IIb study met its primary endpoint it created even more reasons to be optimistic, with a 63% upside in progression-free survival.

If you look at THLD's YTD chart you will first notice its massive 500% YTD gains, but also that it has consistently maintained its gains. The stock fell by 25% from March 30 till June 15 but has since recovered to trade higher by 20% since then, while the NASDAQ also traded higher by 3.50%. The company hasn't really announced anything to create additional optimism over the last two weeks, but it has fluctuated between $6.20 and $7.50 since its February rally. If I were looking to enter a position in THLD I believe the best points are either under $6.50, or if the stock can exceed $8.00 (which would be better served as a trade rather than investment) as the stock could possibly breakout and trade even higher. The stock is currently trading at $7.40 with a short-term direction that could trend either way. Overall, I think it's worth watching because if studies continue to impress this is a stock that has considerable upside potential.

Galena Biopharma is a stock that traded with just as much optimism during the first three months of 2012 as THLD. The stock traded with gains of 500% up until March 21 as a result of the company obtaining patents, its IND application being approved, the company initiating its Phase 3 PRESENT trial ahead of schedule, and also announced very compelling data for its lead candidate, NeuVax. A promising breast cancer drug, NeuVax has been under the spotlight due to it being a Phase 3 candidate that has decreased the chances of recurrence in every subgroup of patients that is treated with the vaccine. Galena is now evaluating NeuVax in a Phase IIb trial with Herceptin, it just announced the results from NeuVax being used as a booster shot, and there is the phase III trial where it is being evaluated as a treatment for patients expressing low levels of HER2, a market that could be between 50% and 70% of all breast cancer patients, therefore creating massive revenue potential in the billions.

GALE earned the label of being one of the more volatile stocks in the market when it lost 55% of its value between March 21 and May 14. Even at the stock's low point in May, it was still trading with a YTD gain of nearly 150%, which shows the extent of profit taking that occurred during the two months between March and May. However, since May 16 the stock has been in rally mode with a 50% gain from then till June 29. The current rally is a result of several key developments, most notably the results presented at the recent ASCO meeting. The company presented data for its booster shots which showed that 94.4% of patients who took NeuVax were disease-free at 60 months, compared to 74.1% in the control group. As a result of such compelling data, Cantor Fitzgerald initiated coverage with a $4 price target and a buy rating, and Roth Capital Partners reiterated its $5 price target, therefore creating the current rally that has led to a 50% gain. In my opinion, GALE would best be considered an investment and not a trade to be bought and sold with the short term in mind only. It is a volatile stock, and if its results continue to impress, then its upside could far outweigh its current valuation, resulting in market leading gains for many years to come. This should outweigh the risks associated with attempting to time chart peaks and dips.

Orexigen Therapeutics is a biotechnology company that is one safety trial away from potentially adding another weight loss drug to a large market filling with obesity drugs. The stock has rallied in 2012, following the direction of Arena Pharmaceuticals (ARNA) and Vivus (VVUS) as 2012 has been a year for optimism in the weight loss space. OREX began the year priced particularly low after the company completed a public offering to end 2011. It then traded higher by 210% in the first three months of the year, until March 19, as optimism spread for weight loss drugs. Unlike GALE and THLD there have been few key developments to support the rally, as OREX is currently conducting a safety trial following a request from the FDA in early 2011. The opinions surrounding all three of these companies that produce weight loss drugs are varied, however OREX is the cheapest in terms of market cap, but with potential that is still unknown considering it will arrive late to the weight loss party.

OREX traded much like the other two stocks on this list, and lost value between March 20 and June 7 of nearly 40%. However, as a result of ARNA's recent FDA approval, and VVUS' being right around the corner, OREX has traded with much optimism with gains of 85% since June 8. The stock has been upgraded, however no significant key developments unfolded to validate its large position. At this point, the future of this stock is totally dependent upon its safety trial, as the drug did create some concerns regarding blood pressure and heart rate. Personally, I am not sold on OREX or its rally. I do believe that its safety trial will "pass the test", yet by the time it's approved and begins marketing and manufacturing Contrave, both VVUS and ARNA will have their weight loss drugs on the market. The bull will argue that OREX is the cheapest in terms of market cap and has the most upside potential as a stock, which is a valid argument if Contrave is as successful as its competitors. However, that is still unknown at this time.

Each company on this list is dramatically different yet has traded with a similar trend and present significant upside potential. THLD seems to have the most consistency, GALE the most upside, and although OREX has large upside it could have a very volatile road ahead depending on the success of its competitors and a very crucial safety trial. As an investor, I think all are worth watching and have drugs that show a clear benefit for patients, which is what biotechnology investors seek. Picking good entry points in each of these is important as all three stocks are showing signs that they could be trading higher in the coming weeks.

Disclosure: I am long GALE.

Source: Q1 Biotech Movers Making A Comeback