Every investor who partakes in the biotech sector is looking to find the next Genentech
But not every biotech stock will be the next biotech multibagger. There are myriad risks relating to clinical trials or FDA regulatory reviews.
Learn the labyrinth
You can, however, reduce your risk by delaying your investment until a drug has reached the later stages of the clinical trial process. For instance, a drug entering phase 3 studies has a two-thirds chance of getting approved, while a drug entering phase 1 trials only makes it to market 20% of the time.
Unfortunately, this reduced risk comes at a price. For example, less risk-tolerant investors who bought shares of Genentech in 2004 after its cancer treatment Avastin was first approved for marketing have been rewarded with a solid 75% return -- but folks who bought shares after Genentech's first positive phase 3 trials back in 2003 have seen more spectacular 220% returns.
I hope you'll agree, though, that both are big returns. Here are several biotechs -- with drugs in different stages of the clinical trial and regulatory process -- that are worth watching right now.
Drug in pivotal clinical trials
British drug developer SkyePharma
Flutiform is similar to GlaxoSmithKline's
With Abbott Laboratories handling the U.S. marketing of the drug, Flutiform has the potential to carve out a meaningful share of the nearly $20 billion asthma and chronic obstructive pulmonary disease market, if it can gain marketing approval.
The best part about SkyePharma for prospective investors is that its shares have been down nearly 50% over the past year. With a market capitalization of only $350 million and a drug candidate that has blockbuster potential, SkyePharma could be worth a look, even for less risk-adverse biotech investors.
Drug awaiting regulatory review
For many investors, however, buying shares of a pharmaceutical company before phase 3 data is announced is just too risky for their blood. So if you're looking for a biotech with a drug that has had excellent phase 3 data and stands a good chance of gaining marketing approval, consider Gilead Sciences
Gilead filed for marketing approval of its recently acquired drug candidate for pulmonary arterial hypertension, ambrisentan, just last month. If granted a standard review, ambrisentan has the potential to be on the market by next September.
Ambrisentan is very similar to Actelion's Tracleer, except that in current clinical trials, ambrisentan appears to have a lower incidence of liver toxicity than Tracleer. This is a big competitive advantage over the $500-million-a-year Tracleer, and if approved, it could propel Gilead's top line for years to come.
Drug just entering the market
Trying to predict whether the erratic FDA will give a drug awaiting marketing approval the thumbs-up or thumbs-down can be an expensive gamble. Risk-adverse investors who would rather buy shares of a biotech with a product just entering the market may want to take a closer look at Nektar Therapeutics
This innovative biotech has developed an inhalable version of insulin named Exubera, which reduces the need for some insulin shots among diabetics. Exubera was approved by the FDA in January of last year. Pharmaceutical powerhouse Pfizer
The Foolish bottom line
So there you have it: Three biotechs worth keeping on any investor's radar screen.
If you'd like to learn more about biotech investing and are curious about companies with even bigger potential, consider trying our Motley Fool Rule Breakers growth investing service free for 30 days. There is no obligation to subscribe.
Click here for more information about a free 30-day trial to Rule Breakers.
Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Glaxo is an Income Investor pick. Pfizer is an Inside Value recommendation. The Fool has a disclosure policy.