3 Innovative Biotech Stocks to Watch in 2014

Biotech investors were treated to a tremendous year in 2013, which may have been the industry's best year ever. If you stack the performance of any major biotechnology index against the S&P 500 or Nasdaq, you can bet it won't be close. See for yourself:

IBB Total Return Price Chart

IBB Total Return Price data by YCharts.

Investors shouldn't necessarily expect an encore in 2014, but that doesn't mean great investing opportunities don't exist. You may want to keep an eye on Alnylam Pharmaceuticals (NASDAQ: ALNY  ) , Incyte (NASDAQ: INCY  ) , and Isis Pharmaceuticals (NASDAQ: ISIS  ) . Here's why.

Alnylam Pharmaceuticals

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In case you missed it, Alnylam soared on news of two separate deals last week: a $700 million development deal with longtime partner Genzyme, a Sanofi company, and an acquisition of Sirna Therapeutics from Merck. Alnylam is developing novel therapies for rare diseases using RNA interference, or RNAi, which regulates gene expression. In other words, the company can turn on genes needed for proper bodily function (genes making vital proteins) and/or turn off genes at the root of a disease (genes making faulty versions of critical proteins).

Aside from the megadeal announced with Genzyme, Alnylam enters 2014 with the expectation of having up to seven RNAi therapeutic programs in clinical development by the end of 2015. That includes two in phase 3 and up to six in proof-of-concept studies, which could expand further in the next two years. It certainly appears that the RNAi approach to gene therapy is picking up steam throughout the pharmaceutical industry -- it didn't win the 2006 Nobel Prize for Physiology or Medicine for nothing -- and Alnylam would be your best bet to ride the wave in innovation.

Isis Pharmaceuticals

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^SPXTR data by YCharts.

Isis has leveraged its pioneer status in developing RNA-targeted therapeutics to build an incredibly diverse pipeline based on antisense technology. While antisense is not the same as RNAi, it is similar as both target RNA (rather than proteins) to affect gene expression. In fact, Isis earned $7.5 million from the most recent deal between Alnylam and Genzyme, which has roots in Isis' deep intellectual property portfolio that covers various RNA-targeted technologies.

The company's leadership position in RNA technologies has landed it partnerships with Genzyme, Biogen Idec, GlaxoSmithKline, Pfizer, and more for disease areas ranging from cancer to inflammation, cardiovascular, and rare genetic disorders. Isis enters 2014 with more than 20 ongoing clinical trials, sporting a strong balance sheet with more than $600 million in cash, and coming off its best year ever generating more than $150 million in revenue from product sales, collaborations, and milestone payments. Given the disruptive potential of the company's technology platform, a market cap under $6 billion should be a steal for long-term investors -- even after a giant 2013.

Incyte

^SPXTR Chart

^SPXTR data by YCharts.

I've been writing about the JAK inhibitor portfolio of Incyte for quite some time now. Despite a massive run-up in shares in 2013, there could still be plenty of profit left for investors. Incyte just boosted its balance sheet and paid down its immediate debt, hired former Novartis President of Oncology Names Herve Hoppenot as CEO, and continues to release positive data from trials. Not only does the company have a growing myelofibrosis drug named Jakafi already on the market, but with more than 15 ongoing clinical programs being funded in part by Novartis and Eli Lilly, it also has one of the most enviable pipelines in the industry.

What's the big deal about JAK inhibitors? Whereas some cancer drugs and most, if not all, current biologics are injected, JAK inhibitors are taking orally, significantly boosting the convenience factor for the drug class. They can also be manufactured at a lower cost compared to biologics, which would boost margins or lower prices -- or both -- for patients. Incyte could have multiple blockbusters on its hands as long as the drugs prove to be safe and effective.

Incyte's oncology pipeline may be led by the JAK 1/2 inhibitor Jakafi, but it also includes two more selective JAK 1 inhibitors (presumably safer) as well as three compounds not included under the JAK inhibitor umbrella. Meanwhile, the company's lead anti-inflammatory drug baricitinib, also a JAK 1/2 inhibitor, could easily have blockbuster potential for treating rheumatoid arthritis and psoriasis. Simply put, it's rare to find so much potential in one pipeline. So while a market cap of $10 billion sounds expensive, you can bet any number of Big Pharma companies would write a check for considerably more if Incyte succeeds.

Foolish bottom line
The biotech industry can create overnight multibaggers just as easily as it can make crater-sized holes in your portfolio. However, if you research accordingly, catch trends among the larger companies and invest in developing companies with diverse portfolios and competitive advantages, then you have a great shot at success. Don't get caught on the sidelines just because Alnylam, Isis, and Incyte are coming off spectacular years -- the growth stories are far from over.

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