A Year-End Look at 3 High-Flying Biotech IPOs of 2013: PETX, RCPT, STML

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In 2013, 33 biotech companies went public, raising a total of $2.5 billion from their IPOs and easily eclipsing the previous record of 26 biotech companies that raised $1.9 billion in 2000. As expected, these new companies posted some big pops and steep drops.

Therefore, let's take a closer look at three IPOs that could finish 2013 with triple-digit gains: Aratana Therapeutics Inc. (PETX), Receptos Inc. (NASDAQ: RCPT), and Stemline Therapeutics Inc. (STML).

Source: IPO filings, industry websites.

Will these three stocks continue to rally in 2014?

Aratana: An exclusive bet on pet health
Aratana develops pet health products for cats and dogs. Unlike other animal health companies, such as Zoetis which focuses on both farm animals and companion animals, Aratana provides products aimed exclusively at pets.

Aratana notes that spending from U.S. pet owners has climbed dramatically over the past 19 years, rising 212% from $17 billion in 1994 to $53 billion in 2013. Although that certainly indicates that the market is growing, it could be at least a few more years before the company gains market approval for any of its products.

Yet Aratana notably rallied on Dec. 23 after announcing that it had met all of its 2013 milestone developments. A clinical study of AT-001, its osteoarthritis treatment for dogs, showed a 61.6% success rate compared to 42.2% for the placebo group. Aratana has also initiated a study with 150 dogs for its appetite stimulating drug AT-002, for which it expects top-line results by 2015. Lastly, it announced plans to start a field study for AT-003, its drug for postoperative pain in dogs.

As it stands, there won't be much to look forward to in 2014 for Aratana. The stock will likely be moved by interim data regarding its clinical studies of AT-001 and AT-002. Aratana's acquisition of Vet Therapeutics in October notably added veterinary biologics to its pipeline and could slightly accelerate the company's growth toward becoming a commercial-stage company.

Receptos: A new bet on an oral multiple sclerosis drug
Biotech investors have probably noticed a spike in demand for oral multiple sclerosis drugs over the past year. To date, only three oral drugs for relapsed MS have been approved: Novartis' Gilenya, Sanofi's Aubagio, and Biogen's (BIIB 0.23%) Tecfidera.

Of these three, Tecfidera is Wall Street's preferred MS drug, and analysts believe it could eventually achieve annual peak sales of $3.8 billion. Tecfidera's side-effect profile is considered milder than that of Gilenya and Aubagio, which also makes it a major threat to older infused and injected MS treatments such as Biogen's own Tysabri, Sanofi's' Lemtrada, and Teva's Copaxone.

That's where Receptos comes in. Receptos' lead drug candidate, RPC1063, is another oral treatment for relapsed MS. It is in phase 2/3 trials, with interim data expected next year. Receptos is also enrolling patients in a phase 2 trial that is evaluating RPC1063 as a possible treatment for inflammatory bowel disease, or IBD.

Receptos' second main treatment is RPC4046, a recombinant humanized monoclonal antibody licensed from AbbVie (ABBV -0.30%) for the treatment of eosinophilic esophagitis, or EoE, an allergic/immune-mediated disease characterized by respiratory problems and inflammation. AbbVie, which is holding on to an option to license the drug, has reported positive data from a phase 1 study, noting that the drug improved lung function in patients with asthma caused by EoE. Receptos is counting on RPC4046 to be approved as an orphan drug, due to an unmet need in EoE treatments.

Since Receptos has no approved products, it is still a highly speculative play mainly dependent on how RPC1063 measures up to approved oral treatments for relapsed MS.

Stemline: A new rival for Verastemz
Stemline focuses on killing cancer stem cells by inhibiting IL-3R, or interleukin-3 receptors. IL-3R has been found to be highly expressed by tumor cells and cancer stem cells.

Stemline has two main product candidates, SL-401 and SL-701. SL-401 is focused on acute myeloid leukemia, or AML, and SL-701 is focused on two kinds of brain tumors -- brain stem glioma in children and gliboblastoma in adults. Both drugs are in several phase 1 and 2 trials. Patients in a phase 1/2 trial of SL-401 for BPDCN (a rare tumor that comes from plasmacytoid dendritic cells) notably showed a response rate of 83%.

Another company, Verastem, is also trying to shut down signaling pathways for cancer stem cells, although it focuses on two other pathways -- FAK and PI3K/mTOR -- instead.

In 2014, both Stemline and Verastem's stock prices will be fueled by interim data regarding their respective pathways, and by possible future collaborations with larger pharmaceutical companies.

The Foolish takeaway
All three of these stocks have promising pipelines that are worth keeping an eye on in 2014. However, interested investors should do their due diligence and know the risks involved in investing in these pre-revenue biotechs.

Conservative investors who are interested in the technologies that Aratana, Receptos, and Stemline are working on can also consider investing in more established companies such as Zoetis, Biogen, and Pfizer, which respectively offer similar products (animal health products, MS drugs, and PI3K/mTOR inhibitors) in their portfolios.

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