It's been a banner year so far for biotech, but a handful of stocks have been travelling in the opposite direction of the iShares Nasdaq Biotechnology index. The industry-tracking index has risen about 26% this year, without the help of Intercept Pharmaceuticals Inc. (NASDAQ:ICPT) or Progenics Pharmaceuticals, Inc. (NASDAQ:PGNX). While these two underappreciated gems have been slipping, shares of Dynavax Technologies Corporation (NASDAQ:DVAX) have risen more than fourfold. Despite the massive run-up, I think there could be more upside for this vaccine developer.

Although these biotech stocks are surrounded by too much uncertainty to fit in my personal portfolio, bold investors could see big gains from each one over the long run. Here's a closer look. 

Three doctors giving a thumbs-up sign.

These three biotech stocks deserve a thumbs-up right now. Image source: Getty Images.

A big head start

Intercept Pharmaceuticals Inc.'s stock price has been slipping in response to safety concerns for its lead drug, Ocaliva. The Food and Drug Administration approved the drug for treatment of a rare liver disease called primary biliary cholangitis last year, but the company's main value driver is Ocaliva's potential as a treatment for a much larger indication.

Roughly one-third of Americans have fatty livers that got that way without abusing alcohol, and perhaps one-fifth of this group suffers from inflammation that can lead to permanent scarring of the vital organ. Nonalcoholic steatohepatitis (NASH) is a life-threatening condition, but there aren't any drugs approved to treat it. The first will almost certainly become a multibillion-dollar blockbuster.

As you can imagine, more than a few drugmakers are developing NASH candidates, but Ocaliva is miles ahead of them all. A late-stage clinical trial designed to support an application that would expand Ocaliva's addressable population to include millions of NASH patients is expected to wrap up in 2019. Intercept's drug has already shown promise among NASH patients in earlier studies, which suggests there's a solid chance the company can get Ocaliva in front of the huge NASH population without any competing drugs to hinder its expansion.

The stock has been beaten up in response to a patient death in a mid-stage NASH trial with Ocaliva, and a warning letter recently sent to physicians highlighting potential danger associated with higher-than-recommended dosages of the drug. While these safety issues are valid concerns, I don't think they'll prevent Ocaliva from becoming the first available NASH treatment. 

Intercept's recent market cap is a sprightly $2.45 billion. That seems awfully low for a company that could launch a drug physicians are already familiar with into an untapped market estimated at $30 billion annually.

A rocket made of money.

Image source: Getty Images.

There's more fuel in this rocket

Dynavax Technologies Corporation took a huge hit last year when the FDA refused to approve its lead candidate for the second time. That beatdown set the stage for a massive run-up this year, driven largely by a 13-to-1 advisory committee vote in favor of approving the hepatitis B vaccine even though five out of 4,425 patients given the vaccine during a clinical trial suffered a pulmonary embolism during a year-long observation period.

About 19,000 Americans are infected with the incurable disease each year, and this figure would be probably be much lower if the FDA had approved Heplisav-B years ago. A majority of patients never complete the six-month, three-dose regimen required for currently available vaccines. Heplisav-B is effective with just two injections spaced four weeks apart, and I'm betting regulators and healthcare providers will agree increased compliance will create a benefit that outweighs the potential risks.

To address the risks, Dynavax will need to conduct a big post-marketing safety study, if approved. Dynavax had expected an approval decision earlier this month, but it's been pushed back to finalize post-marketing study details.

I find it hard to believe the FDA would be discussing a post-marketing study for a drug it doesn't intend to approve. If successfully launched, Heplisav-B is expected to generate annual sales of about $700 million for Dynavax. Biotech stocks generally trade at mid-single-digit multiples of total sales, which suggests this company's recent $1.14 billion market cap has much further to climb.

The bigger picture

Progenics Pharmaceuticals, Inc. has a lot more going on than its recent $440 million market cap would lead you to believe. The company is on the cusp of filing a new drug application for Azedra, a potential treatment for rare forms of cancer that affect the adrenal glands. The beaten-up biotech also has an imaging agent, named 1404, in late-stage development that could vastly improve noninvasive prostate cancer detection, plus a special laxative to relieve opioid induced constipation, called Relistor, that's been on pharmacy shelves for years.

Granted, Relistor sales haven't been too thrilling, and a recently announced delay to Azedra's upcoming submission wasn't what investors wanted to hear. The company says it needs more time to prepare Azedra's manufacturing site for an FDA review, but such a delay is hardly the end of the world. The important thing to bear in mind is that the clinical trial supporting the upcoming submission hit its main goals, which makes an approval seem likely.

While I think there's a good chance all three of these stocks can provide market-beating gains over the long run, Progenics might be my favorite of the bunch. Pheochromocytoma and paraganglioma are ultra-rare malignancies, but without any drugs approved to treat them yet, a successful launch for Azedra could lead to around $250 million in annual sales for Progenics. That's more than enough to justify the company's current market cap on its own. With 1404 and Relistor in the mix, this stock looks like a terrific bargain.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.