4 Small Biotech Stocks That Should Continue With Large Returns In 2013

by: A. John Hodge

The year 2012 has been a great one for the development of products in the treatment of cancer. We've seen clinical data and approvals from the largest of biotech companies to the most speculative of biotechnology companies. The promising results have occurred as we have become more intelligent, have learned more about the disease, and are therefore more able to develop superior therapeutics. In this article, I am looking at four smaller companies that are developing promising candidates, and have the potential for further gains in 2013, adding to the already large gains in 2012.

In a previous article, I tied the immediate upside in shares of Celldex Therapeutics (NASDAQ:CLDX) to whether or not its breast cancer drug CDX-011 would prove to increase survival. On December 10, the stock traded higher by as much as 25% when it announced news that CDX-011 not only delayed tumor growth, but also extended survival in those who are GPNMB-positive. The company is now valued at $415 million after its 155% gain in 2012, and has rallied more than 30% since my first piece. However, it might still trade higher in the year ahead.

In addition to the positive data from its breast cancer drug, Celldex also announced positive three-year survival data for its other late-stage product, rindopepimut, and positive results from a Phase I study for yet another product, CDX-301. Thereupon, I think it is safe to suggest that Celldex is a company with a promising pipeline and big-time sales potential. The company doesn't have one blockbuster product with multi-billion dollar potential, but does have a collection of products with peak sales potential between $500 million and $1 billion. To that end, the company becomes very attractive as an acquisition target or licensing partner.

At $400 million, the company could easily be acquired for a 100% premium and still be short one times peak sales for both of its lead products. I believe that in 2013, the rumors of a takeover and/or partnership combined with the continuation of clinical trials will continue to add value. I would not expect another 155% return in the year ahead, however. The gains will most likely slow due to some concerns regarding trial size and potential frustration regarding the need for another clinical study. Either way, this is a company that is valued correctly and should continue to trade higher as the developments continue to spark optimism.

NewLink Genetics (NASDAQ:NLNK) is a company that I would have never expected to lose 15% of its value since the end of August. The company's "HyperAcute" platform is diversified with large sales potential and very encouraging early data to complement its valuation. Yet despite its 15% loss since August 29, it's still trading with a 70% 2012 return. The reason for its gains in 2012 is due to promising clinical data. The company has two late-stage products that fall under its HyperAcute platform, in the treatment of melanoma and pancreatic cancer. Its melanoma vaccine was well-tolerated with a median overall survival of 29 months. And its pancreas treatment indicates a 42% overall survival at three years. Both treatments are still being evaluated, but are very promising and will potentially push the stock much higher in 2013.

In Q2 2013, NewLink Genetics might trade considerably higher with important data for its HyperAcute pancreas product. This will be the data that should change the company throughout the remainder of its clinical study and possibly solidify the potential of this product. That's because up until this point some have been skeptical. The company's melanoma data accounted for just 25 patients and its pancreatic cancer trial was incomplete as well. Due to that, Q1 data will be the first large-scale presentation that we've seen and should be a good indication of what's to come. Furthermore, there is a level of high risk associated with the stock; but if its Orphan Drug designation is any sign of the outlook, then it might be worth the risk.

Since August 29, Sunesis Pharmaceuticals (NASDAQ:SNSS) has rallied more than 20% after a significant pullback in the last few months. Back when I first began covering the stock, its upside potential was speculative, based on unknown results. However, after positive interim data of its Phase III trial for vosaroxin, the upside seems much clearer. Vosaroxin is used to treat a very rare form of leukemia and has sales potential between $500 million to $700 million if proven to be successful. So far, all signs point to successful data, especially following its 53% rally back in September after increasing the size of its Phase III trial by 225 patients.

Sunesis Pharmaceuticals is setting itself up for what could be a very successful 2013. The fact that the Independent Data & Safety Monitoring Board recommended the larger study after interim data is very encouraging. Since reaching highs of nearly $7.00 back in October, the stock has since fallen back to near $4.00, making it quite undervalued compared to its potential. Sunesis is now a $200 million company with a potentially $600 million product. Nonetheless, it will be awhile before data, and the company does not have the speculative aspect of a potential partner (because it already has a partner). Thus, I would anticipate flat trading near these levels for the first part of 2013, but large gains towards the end of the year as vosaroxin comes back into the spotlight.

Back on August 29, Galena Biopharma (NASDAQ:GALE) was chosen as the stock with the most upside due to the catalyst of final analysis from its Phase II trial. The stock traded higher by more than 25%, but has since pulled back following its final analysis, although not because data was discouraging. Galena's NeuVax has already been proven to be effective at 36 months (its Phase III landmark data); however, the final 60-month data is important because it shows the potential of booster shots and the vaccine's ability to prevent the recurrence of breast cancer over a long period of time. Ergo, the fact that patients vaccinated with NeuVax saw just a 5.6% recurrence rate, compared to a 25.9% rate for those not vaccinated with NeuVax, is a huge distinction and might be a sign of what's to come.

Much like the first time I covered these four companies, I believe Galena presents the most value. The company has posted gains of 250% in 2012, but has fallen 30% since announcing final Phase II data. The company pulled back in anticipation of financing, and then fell another 17% on Tuesday after announcing an offering to raise $24 million. After the offering is complete, the company will have $40 million in cash, which will be more than enough to complete enrollment and learn the interim results of the Phase III trial. Looking ahead into 2013, there will be no fears of financing hanging over the stock and its interim Phase III data will be one of the more anticipated announcements of data among the small biotech community. Analysts have $4.00, $5.00, and $6.00 price targets, and if data is good then the stock will likely instantly trade to these levels. Accordingly, the question of upside becomes whether or not you feel there will be good data, and also if the company can continue to find partners for NeuVax. At this time, I have seen no reason to believe that data will disappoint. Hence, I think Galena is a buy with huge upside in 2013, having a market cap of just $104 million and a product worth billions if successful (a very favorable risk/reward ratio).

Although each of these companies is speculative, all appear to present some level of upside in 2013. Celldex looks to be fairly valued, possibly slightly below, and should continue to trade higher as positive data, partnerships/potential takeover rumors, patents, and discussions with the FDA occur. Both Sunesis and NewLink will be significantly affected either way with data. At this point, all signs point to positive data and, if so, large gains will present themselves. In regard to Galena, the company is cheap compared to its data and marketing potential. However, much of its upside will be a reflection of the company's ability to execute, market itself appropriately, find potential partners, and the outcome of institutional interest, once funds rebalance. In January, Galena was just a $35 million company and was therefore not added to large funds. In 2013, it will meet many of those requirements, and could see significant buying pressure in Q1 as funds that buy based on market capitalization acquire the stock. Considering all of the developments in these promising companies in 2012 and the upcoming catalysts discussed, I believe that each is presenting the potential for gains and could have a great year in 2013.

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

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