All-Star Stocks: Grand Slam Biotechs

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In the spirit of today's All-Star Game, our own all-star analysts offer a glimpse at their best-performing stocks over the past few years.

My style for much of my investing career has been to dig up interesting, small-cap biotech companies. Essentially, this boils down to trying to find good drug programs early in development before the rest of the market takes notice. This high-risk approach is much like a slugger walking up to the plate with the sole intention of putting the ball out of the park. Sometimes the ball will land out in the upper deck, but mostly it ends up back in the catcher's mitt, with the batter taking a head-down stroll back to the dugout. That's the feast-or-famine game the biotech investor is playing.

Like all biotech investors, I've had my share of hits and whiffs. Today, I'll tell you about a few stocks that worked out really well for me, so we can know what to look for in other companies in the future.

Underserved niche markets
In the past two years, I found two great companies in small and largely ignored markets: BioMarin Pharmaceuticals (Nasdaq: BMRN) and Transkaryotic Therapies, which was acquired by Shire Pharmaceuticals (Nasdaq: SHPGY) last year. These companies were developing drugs for extremely rare genetic diseases that affect only a few thousand people worldwide. Big pharmas are generally not interested in such niche markets, and for good reason, since sales are so small that they're not going to move their top line much.

But for a small biotech company, markets that are worth a few hundred million dollars a year are equivalent to a gold mine -- particularly when there are no competitors even trying to enter the market. That's what attracted me to both BioMarin and Transkaryotic, since they both had multiple drugs in their portfolios for these kinds of diseases. As it turned out, both were successful in getting drugs to market, and their stocks soared. Both companies were multibaggers for me, and I still own shares of BioMarin because it has a lot of room left to grow.

And here's the pitch ...
I suggest that Fools look for companies that have good drugs with minimal competition. Now, it's somewhat rare to find companies that have niche markets all to themselves. More commonly, you can find segments of larger markets where a biotech company can carve out a nice slice for itself. As just one example, I'll toss out PDL Biopharma (Nasdaq: PDLI) with its drug Nuvion. This drug is being developed for the most severe cases of ulcerative colitis, which is roughly 10% of the overall UC market. This is a niche of a larger market where Nuvion could thrive because of lack of effective competition.

Charly Travers is a Foolish biotech analyst for Rule Breakers . To see more of his selections, click here for a risk-free trial.

Charly owns shares of BioMarin Pharmaceuticals and PDL Biopharma. BioMarin was recommended in Stocks 2005 and Stocks 2006. PDL Biopharma is a three-time selection in Rule Breakers. The Fool's disclosure policy is here.