3 Biotech Companies That Could Be the Next Intercept or InterMune

Nearly every industry has witnessed a huge rebound since the market bottomed out in March 2009, but few have delivered as strong a gain since 2012 as the biotech sector.

Simply put, biotech stocks are on fire. Venture capital is pouring into the sector, with 38 companies completing IPOs in 2013 and a number of others slated to go public this year. It's not hard to see why when performance data on Finviz shows that 196 of 228 biotech stocks are up year to date. And some aren't just up -- they've absolutely soared.

Earlier this week, shares of InterMune (ITMN.DL) exploded higher after the company reported positive phase 3 results from its trial involving pirfenidone as a treatment for idiopathic pulmonary fibrosis. The Food and Drug Administration rejected this therapy, also known as Esbriet, in 2010, but in the study it delivered a 43% overall reduction in death or disease progression relative to the control arm. Shares abruptly surged 171% higher following the news.

In similar fashion, Intercept Pharmaceuticals (ICPT) shares skyrocketed more than 500% in a two-day stretch in early January after its treatment for nonalcoholic steatohepatitis,or NASH, obeticholic acid, or OCA, met its primary endpoint in a midstage study. Its FLINT trial was actually stopped early because the data safety monitoring board found a highly statistically significant improvement in liver histology due to OCA. Since severe cases of NASH can affect up to 6 million people in the U.S., there's huge marketing potential for this drug if it succeeds.

Source: OpenClips, Pixabay.

These mammoth gains have biotech-savvy investors scouring the sector for the next Intercept or InterMune. While no one knows with any certainty which biotech will be next, I'm willing to throw out three guesses as to which companies have the potential to move significantly higher if their pipeline hits the sweet spot. Understand that this isn't an assertion that I believe these stocks will soar, but merely an indication that these companies have a lot of potential if the data work in their favor.

Peregrine Pharmaceuticals (NASDAQ: PPHM)
Peregrine Pharmaceuticals went on a wild ride in 2012, with shares rising from roughly $0.40 to above $5 following midstage data on bavituximab, its second-line drug for nonsmall cell lung cancer, or NSCLC. The ride wouldn't last long, though, with the stock crashing down by more than 80% after Peregrine noted, just weeks later, that the data shouldn't be trusted because of errors at a third-party clinical contractor. By the time all was said and done, months later, Peregrine Pharmaceuticals had reported a statistically impressive 116% improvement in median overall survival to 12.1 months, but its data was largely dismissed by investors who didn't know what to believe.

Peregrine's phase 3 study of bavituximab known as SUNRISE will soon help decide which side is correct. The trial compares the combination of bavituximab and docetaxel against a control arm, with the primary endpoint being a statistically significant improvement in overall survival.

What's particularly unique, and the reason investors should pay close attention to Peregrine, is that bavituximab is one entrant into the extremely competitive race to develop cancer immunotherapies, which train the body's immune system to recognize and attack previously undetected cancer cells. Bavituximab works by blocking phosphatidylserine, which is an immunosuppressive molecule found on the outside of cancer cells that allows them to remain undetected by the body's immune system. If successful, bavituximab could revolutionize the second-line treatment for NSCLC, and it may hold promise as a first-line treatment, too.

Keep in mind, though, that small-cap biopharmas have a very poor track record of success when it comes to phase 3 oncology-based trials.

Threshold Pharmaceuticals (NASDAQ: THLD)
Another biotech company with potential upside if everything works out well is Threshold Pharmaceuticals.

Source: Idaho National Laboratory, Flickr.

Threshold's lead drug, which is being tested in a number of oncologic scenarios, is TH-302. The drug itself is extremely unique in that its focus is on hypoxic (i.e., low oxygen) cells. When it comes to solid tumor growth, cancerous cells often replicate faster than blood vessel growth can keep up, leaving certain areas of a solid tumor "starving" for oxygen. By contrast, hypoxic cells are typically rare in healthy cell growth. This allows TH-302 to minimize healthy cell death and instead target these likely tumor hot spots.

Threshold's share price could absolutely skyrocket if TH-302 demonstrates highly statistically significant improvement in treating late-stage pancreatic cancer. Partnered with Merck KGaA, Threshold has an ongoing 660-patient phase 3 study known as MAESTRO for metastatic pancreatic cancer. In a phase 2 study, TH-302 delivered a significant improvement in progression-free survival resulting in a 41% reduction of risk for disease progression or death. With improvements being so few and far between for late-stage pancreatic cancer sufferers,Threshold  could benefit greatly if TH-302 drastically improves overall survival.

Shareholders will also want to keep in mind that nearly all of Threshold's valuation is built upon the success of TH-302 and its numerous indications. If one or a number of these indications proves to not be effective, Threshold shares could move lower.

Lexicon Pharmaceuticals (LXRX -0.31%)
Last, but certainly not least, we have Lexicon Pharmaceuticals, a clinical-stage biopharmaceutical company focused on developing therapies to treat a number of different disease indications.

It's been a rough couple of months for Lexicon shareholders, with the company announcing just last month that it would lay off 45% of its workforce following disappointing midstage results for LX1033, a treatment for irritable bowel syndrome. With the layoffs, which point to Lexicon's need to conserve cash, the company will now focus its efforts on its two most advanced clinical studies: LX1032 for carcinoid syndrome and LX4211 for types 1 and 2 diabetes.

The experimental therapy that really has me intrigued and should have investors on the edge of their seats is LX4211. Although this therapy is targeted at all diabetics, the big indication is type 2 diabetes, which comprises about 90% of all cases. LX4211 is an inhibitor of sodium-glucose transporters 1 and 2, or SGLT1 and SGLT2. SGLT2 works by inhibiting glucose absorption in the kidneys, allowing excess glucose to be flushed out via a patients' urine, while SGLT1 inhibitors work in the gastrointestinal tract. 

the FDA has already approved two SGLT2 inhibitors: Johnson & Johnson's Invokana and Farxiga from Bristol-Myers Squibb and AstraZeneca. However, Lexicon's LX4211 is a first-in-class dual inhibitor of SGLT1 and SGLT2. The allure of SGLT2 inhibitors such as Invokana and Farxiga is that they lead to glycemic balance while also lowering blood pressure and inducing weight loss, which is a notable improvement, in my opinion, over weight-neutral DPP-4 inhibitors. Based on its top-line phase 2 data, LX4211 has also delivered a similar blood pressure and weight loss response while aiding glycemic balance. If LX4211 delivers more impressive clinical results than either Invokana or Farxiga in lessening A1C levels, it's quite possible Lexicon shares could soar. 

One thing investors will want to keep in mind, though, is that Lexicon is still unprofitable and now only has two clinical indications being studied. If one or the other fails, its share price could just as easily move much lower.