Over the past 10-plus years, biotech stocks have been one of the best areas of the market to unearth hidden gems. Scores of pre-revenue drugmakers have delivered life-changing gains for their early shareholders over this period. Not every small- to mid-cap biotech stock is a proverbial diamond in the rough, however. Most of these equities, in fact, turn out to be duds due to the enormous difficulty of shepherding an experimental drug from the bench to the market. 

Which developmental-stage biotech stocks might be an exception to this general trend? The cancer drugmakers Aptose Biosciences (NASDAQ:APTO) and Five Prime Therapeutics (NASDAQ:FPRX), albeit risky, are both wildly undervalued relative to their long-term prospects. Here's why risk-tolerant investors may want to check out these two under-the-radar biopharma stocks soon.  

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Aptose: Catalysts inbound

Aptose is a small-cap cancer specialist nearing a possible inflection point. The brief backstory is that the biotech is developing two novel anti-cancer agents: the oral pan-kinase inhibitor CG-806 for both lymphoid and myeloid malignancies, and the MYC oncogene inhibitor APTO-253 as a treatment for relapsed/refractory acute myeloid leukemia. Both drugs are in early-stage dose escalation trials. The first preliminary data from these ongoing studies are slated to be revealed at the upcoming American Society of Hematology (ASH) meeting in early December.

This forthcoming data preview has the potential to be a game changer for Aptose and its shareholders. CG-806 and APTO-253 have blockbuster sales potential (greater than $1 billion a year in revenue) as novel blood and bone marrow cancer drugs. Although Aptose doesn't have the financial resources to fully develop these compounds on its own, promising early stage data for high-value cancer agents such as CG-806 and APTO-253 have frequently been the catalyst for sizable licensing deals/equity stakes in biopharma. 

Key takeaway: Aptose's stock should get a nice boost if these upcoming ASH data paint an encouraging preliminary picture of efficacy in these hard-to-treat cancers. This tiny biotech, after all, may end up fielding multiple partnering or buyout offers following these presentations. 

Five Prime: A strong buyout candidate

Five Prime's shares are up by a whopping 353% so far this year. The biotech's stock caught fire earlier this month following a positive mid-stage readout for its advanced stomach cancer drug candidate bemarituzumab.

As a first-line treatment for patients with fibroblast growth factor receptor 2b-positive (FGFR2b+) stomach cancer, this experimental drug clearly has blockbuster sales potential. Underscoring this point, there hasn't been a new front-line stomach cancer medication approved in the U.S. in a decade, and this maligancy is the third-leading cause of death among all cancers globally.

Even more impressively, though, Five Prime thinks this novel medication may also be broadly effective across a number of FGFR2b+ malignancies -- including but not limited to squamous non-small cell lung cancer, triple negative breast cancer, ovarian cancer, pancreatic cancer, and intrahepatic cholangiocarcinoma. This small-cap biotech, therefore, might even have a megablockbuster product on its hands (a drug that eclipses the $5 billion a year sales mark). 

Five Prime still has a lot of work to do to flesh out the drug's safety and efficacy profile in its lead indication. But it's also commonplace for big pharma to snatch up these types of promising cancer assets before they ever enter into a late-stage program. In short, Five Prime could very well fetch a sizable buyout offer in the coming months. That's not a surefire outcome to be sure, but Five Prime definitely has the kind of high-value asset that could spark a takeover.  

Even if the buyout thesis fails to materialize, though, Five Prime's shares still have a ton of potential as a growth vehicle. The biotech's current market cap of $792 million pales in comparison to bemarituzumab's long-term commercial opportunity as a possible franchise-level cancer medication.

That being said, Five Prime isn't the type of growth stock that investors should buy with abandon. A lot can go wrong with bemarituzumab's late-stage clinical trial over the next two to three years. Therefore, aggressive investors will certainly want to weigh the biotech's enormous upside potential against its hefty downside risk before buying shares. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.