2 Biotech Stocks That Could Double Your Money

Two small-cap drugmakers with very different paths to the big leagues recently drew cheers from a large investment bank. In fact, the bank predicted gains of 181% or better from their previous closing prices. 

Grizzled investors know that biotech stocks rarely live up to eye-popping price targets, but that doesn't mean there's nothing to see here. 

Data sources: Yahoo! Finance, and analyst notes.

Can shares of these drugmakers double or triple your money? To help you gauge the odds, here's a look at what would need to happen before each of these risky biotechs could deliver market-thumping returns.

1. Durect: Something different

This company is focused on developing DUR-928, a gene expression modifier that could be taken orally by millions of people with non-alcoholic steatohepatitis (NASH), and other disorders of the liver. There still aren't any treatments for this complex epidemic that threatens the lives of around 20 million Americans, so the first ones that prove to effectively halt NASH will probably become mega-blockbuster drugs.

Cantor Fitzgerald analyst Elemer Piros recently began coverage of Durect with huge expectations for DUR-928 as a potential treatment for NASH and alcoholic hepatitis (AH), which results in hundreds of thousands of hospitalizations each year.

The company hasn't produced any meaningful data from NASH patients, but an open-label dose determination study with 36 AH patients looks good so far. The company is measuring Lille scores, which physicians use after seven days of standard treatment with steroids to determine an AH patient's six-month survival odds.

Image source: Getty Images.

A Lille score of 0.01 means there's a 99.9% chance the patient will still be alive in six months, anything above 0.45 suggests a 25% chance of six-month survival. And it gets worse from there. The median Lille score for the first nine patients treated with DUR-928 was 0.04, which looks great compared with a different group of AH patients treated at the University of Louisville that scored 0.41 on the same scale.

Before you get too excited, putting too much faith in comparisons between different populations is historically a great way to lose money betting on biotech stocks. Drugmakers with NASH candidates that produce promising data can command 10-figure market values, but this probably won't become one of them.

2. Kadmon Holdings: Graft-vs.-host disease

Cantor Fitzgerald analyst Eliana Merle thinks this company's chronic graft-vs.-host disease candidate, KD025, could generate peak U.S. sales of $500 million per year. Kadmon could use the cash flows as soon as possible because ribavirin, an aging antiviral responsible for a majority of the company's revenue, is showing its age.

In 2018, Kadmon recorded a measly $714,000 gross profit against $85.9 million in operating expenses, and this year looks worse. That means it's just a matter of time before Kadmon's $86 million cash cushion disappears. That would most likely lead to a secondary stock offering that would significantly dilute the value of existing shares. 

The company absolutely needs KD025 -- an oral drug that inhibits Rho-associated coiled-coil kinase 2 (ROCK2) proteins -- to produce exciting data from its ongoing placebo-controlled study. In a previous single-arm study, 60% of patients exhibited a response, but we don't know if Kadmon's candidate was responsible. If the treatment significantly outperforms a placebo when the study reads out top-line results later this year, the stock could soar.

Image source: Getty Images.

Too many warning signs

Both of these biotech stocks could rocket higher, but they're also flashing way too many warning signals. It's a good rule of thumb never to bet on first-in-class new drug candidates without evidence of safety and efficacy from a clinical trial that includes a control group for comparisons, especially when the company developing it is about to ask for more money.

An investment in Kadmon Holdings would require a great deal of trust in management, which this company doesn't deserve unless you truly believe in redemption. In 2009, Kadmon's founder and CEO, Sam Waksal, finished seventh on Time magazine's list of the top 10 crooked CEOs after serving 87 months in prison for lying to federal investigators and other transgressions.

All he did was alert friends, including Martha Stewart, to dump their shares of ImClone, his former company, before the public found out it was about to receive bad news from the FDA. If Waksal and Stewart had simply admitted doing something they knew was wrong when first questioned, they would have received slaps on the wrist. Instead, they lied about it when questioned by federal investigators, which should make you think several times before buying shares of anything Waksal's allowed to manage.

While doubling your money with one of these stocks isn't entirely out of the realm of possibility, neither one is worth the risk they present.