Terrorism continues to capture a large chunk of each day's news cycle -- just look back over your shoulder to London's recent mass-transit devastation -- and biotech continues its slide down the slippery slope. Ernst & Young reported that the sector lost a combined $6.4 billion in 2004 alone as many investors shifted their focus away from stocks altogether. But as the Fool has always advocated, keep investing in stocks if you want to hang on to your capital over the long haul.

Small pharmas can make for big opportunities
Some smaller biotechs are developing antidotes for big problems -- specifically, they are working on countermeasures in case we're nuked, dirty-bombed, or slathered with germs. No, they aren't Genentech (NYSE:DNA), which earned $785 million last year, or even its chief rival, Amgen (NASDAQ:AMGN), which pulled down $2.4 billion in profits.

I'm talking about tiny little biopharma mice skittering around klutzy billion-dollar elephants' feet. A handful of small pharmas are making drugs for something the U.S. government calls Project BioShield, a 10-year, $5.6 billion plan that -- among other projects -- pumps R&D money into vaccines and medications to load up the Strategic National Stockpile (SNS). These cutting-edge drugs will prevent or treat the effects of anthrax, Ebola, acute radiation syndrome (ARS), and smallpox. In short, the drugs will help us counter the effects of terrorism.

This is the kind of information that Rule Breaking investors salivate over -- like finding a small patch of wind when there isn't a breath of air anywhere. These little babies could double or even triple in value on the news.

Last November, for example, VaxGen (OTC BB: VXGN) nabbed the first big contract under BioShield, picking up a deal worth $877.5 million to produce and deliver 75 million doses of its new anthrax vaccine. VaxGen's 52-week spread was $5.90 to $20.00 -- that's a nifty 300%-plus return. And it's the kind of gain growth investors love.

Don't worry, make money
Savvy investors made money in the post-9/11 anthrax scare. For instance, if you'd owned stock in Lowe's (NYSE:LOW) or Home Depot (NYSE:HD) between Sept. 18 and Nov. 14, 2001 (the delivery dates of the first and last pieces of anthrax-laden mail), you could've had a nice return. Home Depot jumped about 25%. Its stock started at $36.69 and ended at $46.23. Lowe's had even better numbers: its stock rose from $28.91 on Sept. 18 to $42.06 on Nov. 14, for a gain of nearly 50%. Not bad. Why home-improvement centers? Plastic sheeting and duct tape, my friend. People all over the Mid-Atlantic and Northeast were taping everything in sight so they wouldn't inhale anthrax spores.

So who are these small biotechs I spoke of earlier? Take a look at Hollis-EdenPharmaceuticals (NASDAQ:HEPH) and Vical (NASDAQ:VICL).

Potential weapons of mass profit
Hollis-Eden is developing two significant drugs, Neumune and Phosphonol, which will bring to market medical countermeasures to acute radiation syndrome (ARS). ARS destroys normal bone marrow functions -- killing off our white blood cells -- leading to internal bleeding and infection. In preclinical studies, primates given a high dose of radiation had a 90% survival rate when given Neumune and only a 68% survival rate on placebo. If stockpiled, the estimated cost of Neumune treatment is about $100. Phosphonol will protect us against DNA mutations and cancers that result from radiation injury.

As of March 31, Hollis-Eden showed $54.2 million in cash and cash equivalents on the books with a management team that's been in place since the mid-1990s. As of June 22, Hollis-Eden had doubled from its 52-week low of $7.36.

Vical's Ebola vaccine, based on its patented gene delivery technology, has already been supplied to the National Institutes of Health. Preclinical trials have shown that it prevents infection in monkeys. Vical is also working on Allovectin, an immunotherapeutic vaccine for skin cancer, as well as a vaccine for SARS.

In 2004, Vical completed registered direct placement of stock with net proceeds of more than $17 million and garnered revenues of $14.5 million. As of March 31, Vical had $63 million in cash and cash equivalents on its books with a steady management team. And as of June 22, the firm had jumped 75% from its 52-week low of $3.46.

New drugs show you the money
So far, three pharmas have snagged Project BioShield contracts (two of them are privately held):

  • VaxGen: $877.5 million contract for delivery of anthrax spore vaccine. Stock price before the BioShield contract was $12.45. Just one week after the contract, it rose to $17.45.
  • Fleming & Company: $5.7 million contract for delivery of 1.7 million doses of pediatric liquid potassium iodide to combat the effects of radioactive iodine in children; operates as a private entity.
  • BioPort: $122.7 million contract for 5 million doses of anthrax vaccine; operates as a private entity.

More legislation is on its way in the form of BioShield II, which could establish a global stockpile and may spell even greater profits for these small pharmas. And, like ripples on a pond, Hollis-Eden's stock vaulted 8.2% on the news of VaxGen's contract.

The Foolish bottom line
Small pharma companies like the ones detailed above are ripe for the picking. In fact, Amgen, Genentech, and Hollis-Eden are all part of our Rule Breakers Universe, so we actively follow these companies, this industry, and all of biotech's latest developments. Today's underfollowed nobodies could boost your portfolio over the long haul. They're just the sort of disruptive companies Fool co-founder and chief Rule Breaker David Gardner, along with his crack team, hunt for in our Motley Fool Rule Breakers newsletter service. Rule Breakers fields a team of experienced and knowledgeable investors with advice you can put to the test.

C'mon, break the rules -- and possibly score some sweet returns -- by signing up for a free 30-day trial of Rule Breakers. For the next month, we'll take all the risk and you won't pay a cent. Click here to learn more.

VB Rosendahl owns no shares of any of the companies mentioned in this story. She is a champion of underdogs and likes nothing better than a good come-from-behind story. If you know of some great underdogs or would like to comment on this article, please feel free to email her. Home Depot is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.