4 Biotech Stocks With Large 2012 Gains That Still Present Significant Upside

 |  Includes: CLDX, GALE, NLNK, SNSS
by: A. John Hodge

So far, 2012 has been the year of small and midcap biotechnology stocks. We have watched as new innovative drugs have taken the industry by storm and led the market with incredibly large gains. In regard to small cap biotech stocks, almost all are still in the clinical phase, and still have a long journey ahead before potentially earning an FDA marketing approval. Yet, with strong clinical data and undervalued prices, investors have been accumulating shares in companies that could return enormous gains over the next few years. With that being said, I am looking at four companies with encouraging clinical data that suggest the possibility of an FDA approval and continued gains in anticipation of impressive data. Each of these companies has traded higher in 2012, but is still undervalued considering potential sales of lead products, and could very well continue to trade higher by a significant degree if clinical results continue to impress.

Celldex Therapeutics (NASDAQ:CLDX)

Celldex Therapeutics is a nearly $300 million company with two late stage candidates for the treatment of breast cancer and glioblastoma. Rindopepimut, Celldex's most advanced candidate is an immunotherapy that is still enrolling for its Phase 3 trial for EGFRvIII positive glioblastoma. In its previous trial, it showed significant progress in overall survival and progression-free survival. However, with the company enrolling patients, there is not a great deal of news surrounding this candidate. As a result, the focus has been shifted to its breast cancer drug, CDX-011, which is being tested in patients who are GPNMB-positive with advanced breast cancer and have exercised other options of treatment. In its Phase 2b EMERGE trial, patients in the CDX-011 arm experienced overall response rates 19% of the time versus 14% of patients treated with the Investigator's Choice (IC) of chemotherapy agent.

In 2012, CLDX has returned a gain of 86%, and if the company announces that CDX-011 increases overall survival (should be announced later this year), then CLDX could quickly appreciate to reflect its marketing potential. Obviously, further testing is still needed. But with CDX-011 already showing a significant response to patients with high levels of the protein GPNMB, its upside potential is large and its attractiveness to partners and investors will be even larger. A good comparison is, perhaps, ImmunoGen (NASDAQ:IMGN) and its candidate T-DM1. ImmunoGen's product has multi-billion dollar potential. It is an anti-body conjugate (similar to CDX-011) and has driven the valuation of IMGN to over $1 billion, despite the fact that IMGN will only earn 5% of the total sales from T-DM1. In early trials, both of CLDX's candidates are producing results that could garner an FDA approval and, if approved, could create billions in annual sales. The key question will be to determine if overall survival is impressive enough in the drug, which we will know towards the end of this year. If so, CLDX could appreciate to reflect a similar valuation to IMGN.

NewLink Genetics Corporation (NASDAQ:NLNK)

Last year, NewLink Genetics completed its IPO and has rallied ever since, nearly doubling in 2012. The company's "HyperAcute" platform has shown very impressive results in early testing. Earlier this year, the stock traded higher in anticipation of results from its HyperAcute Melanoma and Pancreas candidates, and then rallied impressively following the results from its Phase 2 Melanoma immunotherapy trial. In the study, 25 patients with advanced melanoma began the trial, with four withdrawing due to progressive disease. The vaccine was well-tolerated, with a median overall survival of 29 months. However, its most advanced product, HyperAcute Pancreas, is where the immediate upside lies due to the potential catalysts for much larger gains.

At this last year's ASCO meeting, data for HyperAcute Pancreas was presented, although not fully completed, the data indicated a 42% of overall survival at three years, which is a significant improvement over the predicted outcome of the disease. Yet, despite an improved survival rate, the stock has since fallen lower. The $300 million company is now expected to reach the triggering point for its first interim analysis in the first quarter of 2013, and also expects to complete enrollment during the same period. For some reason, the stock traded lower after the incomplete data was presented; perhaps it was already priced into the stock. With a fallen valuation of $277 million, it is very possible that NLNK could rally at the end of the year in anticipation of results from the study, which would be similar to its performance prior to the results of the melanoma study.

Sunesis Pharmaceuticals (NASDAQ:SNSS)

Another candidate for consideration for additional growth from its already elevated share price is Sunesis Pharmaceuticals. The company, with its lead product candidate, vosaroxin, is expected to announce interim analysis on its Phase 3 trial at some point in the next month. The early data and key developments surrounding this candidate have led to SNSS trading higher by 175% in 2012, and investors are very excited about the possibilities for this company in the immediate future. Vosaroxin treats a rare and deadly form of leukemia in which there is a large unmet medical need with no competing drugs to fight the disease. As a result, it has been granted fast-track status by the FDA along with receiving Orphan Drug designations in both the U.S. and in Europe.

Sunesis is a $150 million company, and its lead product has sales potential between $500 and $700 million, creating a significant upside potential if the product impresses following the announcement of interim results. I believe many are hoping for the best case scenario for this product, as the need for a treatment is obvious judging by the sense of urgency on behalf of regulators, and the fact that there is a lack of treatment options for those with the disease. Therefore, it seems logical to suggest that the company's valuation will be drastically changed by the end of the year. Its trial could very well be halted early for efficacy, proving to be safe, and more than double in valuation--or the stock could decline by 50% if the study does not live up to expectations or proves to be ineffective as a treatment. With that being said, there is a balanced amount of risk/reward, but is still a company worth watching over the next month or so.

Galena Biopharma (NASDAQ:GALE)

Galena Biopharma may be the best on this list in terms of current valuation to long-term upside potential, when considering clinical results. The company has increased in valuation by 240% YTD, yet still trades with a market capitalization of just $110 million. The stock has found a very strong level of support between $1.50 and $1.60, and has slowly but surely increased in valuation since investors took first quarter profits back in April and May. GALE, which was one of the most volatile stocks in the market back in the first quarter, now looks to be a safer investment in a company with good clinical data and multi-billion dollar potential.

Galena's lead candidate, NeuVax, is enrolling patients for its Phase 3 trial, PRESERVE, which will test patients with low-intermediate levels of HER2 to prevent recurrence in those who are recovering from breast cancer. The trial will enroll between 700 and 1000 patients, and fortunately will attempt to reach the same endpoints it achieved in its 200 patient Phase 2 trial. In its Phase 2 trial, the vaccine decreased the chances of recurrence by 50% in patients who expressed low to intermediate levels of HER2. The primary endpoint is disease-free survival after three years, or 139 recurrences of cancer. If approved, NeuVax will treat a large unmet need that consists of more than 50% of breast cancer patients. This large patient population, combined with the fact that it had already achieved the Phase 3 endpoints in a 200 patient Phase 2 trial, indicates that it has a solid chance of approval. Furthermore, if approved, NeuVax would treat far more patients than Herceptin, which treats roughly 25%-30% of breast cancer patients who have high levels of HER2-- and Herceptin is a drug that reported $5.9 billion in 2011. Therefore, with strong clinical data, a stock that has found technical support and billions of potential sales, Galena looks to be a company that has significant upside potential despite already posting large YTD gains already.

Each of the stocks on this list present large upside potential if clinical data continues to support the likelihood of FDA approvals. In addition, these companies are all noticeably undervalued considering the sales potential of its lead products. SNSS presents the most immediate catalyst with pending interim results in September, but it also presents the greatest risk of downside.

NewLink reminds me of GALE, as a stock that traded higher in the early part of the year but has since retraced; and with data expected at the end of the year, it is very likely that it could trade higher in anticipation of strong data.

GALE is the stock that I consider to be the safest at its current level, with the greatest distinction between clinical study results and valuation, and the company that I believe could see the largest gains throughout the next year.

Finally, CLDX has been the most consistent; and with good news from its glioblastoma trial, and results that show CDX-011 is a product that improves overall survival, it could very well trade higher.

With that being said, biotechnology is an industry of opportunity, and each of these stocks look poised to trade higher with strong clinical data that does not reflect current market capitalizations. There is always the risk to the downside, but I believe each of these have favorable risk/rewards and can be good investments for those willing to brave the volatility and speculation.

Disclosure: I am long GALE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.