2 Small-Cap Biotechnology Stocks With Big Promise

Biotechnology stocks offer investors the potential for huge returns, but also carry a lot of risk.  The biggest risk is volatility, which is usually the greatest around significant events/catalysts. Investors looking to invest in biotechnology stocks need to understand these events and the potential impact on the share price that may occur as a result. Below are two promising companies that face important catalysts and could see significant share price appreciation going into the events.

Galena Biopharma (NASDAQ:GALE) is a biotechnology company focused on discovering, developing and commercializing therapies addressing unmet medical needs using targeted biotherapeutics. The company is pursuing the development of cancer therapeutics using peptide-based immunotherapy products, including its main product candidate, NeuVax.

NeuVax is a peptide-based immunotherapy intended to reduce the recurrence of breast cancer in low-to-intermediate node positive HER-2 negative breast cancer patients not eligible for Herceptin.About 75 percent of all breast cancers are HER-2 negative. The vaccine has the potential to dramatically decrease the chances of early stage, node-positive breast cancers from spreading to other areas of the body or to keep it from recurring.

Late last year, Galena announced a partnership deal with Teva Pharmaceuticals (NYSE:TEVA) to develop and commercialize NeuVax in Israel. These partnership deals tend to foreshadow a bright future for the company. The reason for this is that it saves the smaller company producing the drug a lot of time and money.  In this case, Galena can continue to focus on advancing the trials and Teva Pharmaceuticals will focus on establishing a distribution network and clearing any regulatory hurdles within Israel.

In December 2012, Galena announced results from the NeuVax Phase I and II trials. The trials enrolled a total of 187 patients who were rendered disease-free after completion of standard of care multi-modality therapy. The results demonstrated that NeuVax had a strong response rate out to 60 months. At 24 months, 94.3 percent of NeuVax patients were disease-free vs. 86.8 percent of patients on the control arm. At 60 months, 89.7 percent of NeuVax patients were disease-free vs. 80.3 percent of patients on the control arm. Additionally, the treatment was proven to be extremely safe and highly tolerable.

After demonstrating strong Phase II results, the company is now progressing with its Phase III PRESENT trial. If successful, the company has the potential for dramatic share price appreciation. Currently the company is only valued at approximately $200 million. However, the company has the potential to generate billions of dollars of revenue on a NeuVax approval. Even on annual revenue of $1 billion, the company would need to trade with a multiple of at least 2x sales, which would mean a share price of at least $23.00. It is also likely that investors will soon realize this potential which could cause the shares to trade sharply higher as the company continues to progress through its trial.

Investors considering owning shares in Galena should understand that the company is not without risk. The breast cancer industry is extremely competitive with several companies pursuing various treatments. Celldex Therapeutics (NASDAQ:CLDX) reported data from their Phase II EMERGE trial late last year. The trial results demonstrated overall survival benefit in patients with high GPNMB expression. The product currently being evaluated in this trial is CDX-011, an antibody-drug conjugate that attempts to destroy glycoprotein NMB. This type of protein tends to be prominent in various types of tumors, including breast cancer and melanoma.

Another competitor in the breast cancer space is Medifocus (OTCMKTS:MDFZF). The company is developing and commercializing minimally invasive treatment systems used in the treatment of cancerous and benign tumors. Medifocus has various platforms currently being developed but the one applicable to breast cancer is the APA 1000 breast cancer treatment system.  The goal of the system is to destroy localized breast tumors through the application of heat alone or in combination with chemotherapy. The company has already received regulatory approval to begin its Phase III trial.

Despite the risks from competition, Galena certainly appears to be a promising story in the breast cancer space. The company continues to make progress so investors should certainly keep their eye on this company going forward. Despite the promise that Galena holds, investors shouldn’t forget about another small-cap company that appears to be poised for greatness.  That company is Sarepta Therapeutics (NASDAQ:SRPT).

For months now, Sarepta Therapeutics has been in a battle with GlaxoSmithKline (NYSE:GSK) over who can be the first to deliver a Duchenne muscular dystrophy drug to the market. Just recently, GlaxoSmithKline announced their results form a mid-stage trial.  The data revealed that the company’s drug, drisapersen, failed to demonstrate a statistically significant response. Now that the competition has been removed, it appears that Sarepta may be a few months away from a significant breakthrough.

In late July, Sarepta announced that it would submit an NDA for eteplirsen, an exon-skipping compound used for the treatment of patients with DMD who have a genotype amenable to skipping of exon 51.  The company plans to file this NDA in the first half of 2014.  This decision came after the company spent several months discussing various elements of the drug with the FDA.  The decision to file can only be seen as promising as the company would not have decided to skip a Phase III trial if it wasn’t convinced that the FDA would strongly consider an early application.

The reason why investors should be excited about Sarepta is because of the revenue potential.  As mentioned earlier, the competition has been eliminated.  So Sarepta does have the ability to be a single player in the treatment of DMD.  Currently, around 30,000 young men and boys suffer DMD in the U.S., the European Union, and Japan.  In the U.S. alone, approximately 1,900 have a mutation in exon 51 (applicable to eteplirsen).

Given that the estimated cost of eteplirsen is between $300,000 and $500,000 per year, the expected annual revenue in the U.S. alone is expected to be between $570 and $950 million.  Investors should expect Sarepta to trade with a multiple of at least 2x sales, which would mean a potential share price of between $55 and $60.  Given that Sarepta currently trades at around $37 per share, investors could stand to gain a windfall on an FDA early approval.

As seen above, the potential for both Galena Biopharma and Sarepta Therapeutics is immense.  Investors who are interested in investing catalyst driven biotech stocks should strongly consider both of these.  But as always, these catalysts can cause volatility.  Investors should consider proper risk management techniques before investing and only risk what they can afford to lose.

Follow Tom on Twitter @tommymeyer82.

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