Investing in development-stage drugmakers is risky. Really risky. One setback and the company's stock can plummet. Heck, even without setbacks, the stock can head downward. There are two ways to mitigate that risk. The first is to buy a lot of drug companies or keep them as a small fraction of your portfolio.

The second way is to buy companies with multiple chances of getting a drug approved. That way, if one drug fails in clinical trials, the company isn't as likely to tank as much as a company with just one major prospect would. Using either of these strategies could help you hit a home run with your biotech investments.

Today, I'm going to take a look at three companies that address that second factor. Each of these companies has pretty deep pipelines, but no approved drugs yet.


Drugs in Phase 1

Drugs in Phase 2

Drugs in Phase 3


Exelixis (NASDAQ:EXEL)





Seattle Genetics (NASDAQ:SGEN)





Array BioPharma (NASDAQ:ARRY)





Source: Company websites.

Now that we see where these three stand, what are their prospects?

So many candidates, so little cash
Exelixis is a drug discovery machine. It has an uncanny ability to discover inhibitors of kinases, key control points for many different processes in the cell. The company should be able to develop a diverse offering.

With a goal of adding three new compounds to the pipeline each year, Exelixis has no worries about having its pipeline run dry. On the contrary, it has so many drug candidates that it can't possibly run them all through phase 3 development with its cash on hand, only $159 million.

Fortunately it has partnerships with Genentech (NYSE:DNA) and GlaxoSmithKline (NYSE:GSK). Glaxo has already picked up one of Exelixis' 11 drugs and has an option to pick up another.

But one of its phase 2 drugs, non-small cell lung cancer treatment XL647, is being shelved because Exelixis doesn't have the cash to invest in the drug. Lung cancer is a highly competitive market, and paying for a phase 3 trial wouldn't necessarily be the best use of the company's limited resources.

Antibody platform
Seattle Genetics has based its research on antibodies -- specifically antibodies that can kill cancer cells. Some of the antibodies are engineered to directly kill the cells, similar to the way Genentech's Avastin or ImClone Systems' (NASDAQ:IMCL) Erbitux work. But it is Seattle Genetics' indirect killing mechanism that probably has the best chance of stocking its pipeline.

The company has developed a way to add a toxic drug to an antibody to send the drug specifically to the cancer cells. The beauty of the system is that it can be added to a large number of different antibodies, depending on what types of cells the drug is trying to kill.

Not surprisingly, larger drug companies have become very interested in the system and have licensed Seattle Genetics' technology to develop their own antibody drugs. You can almost hear the cha-ching of royalty payments coming.

But that's not all
The seven compounds in Array's pipeline may look small and immature, but the company doesn't count its partnerships on its main pipeline page. Its phase 2 drug ARRY-886 is partnered with AstraZeneca (NYSE:AZN), and although it showed underwhelming results by itself, the drug may work better in combination with other chemotherapies. Array also has partnered with InterMune on hepatitis C drug  ITMN-191, which had pretty good-looking phase 1 clinical trial results.

No such thing as a sure thing
These drug developers are still far from a sure thing. They could run out of money -- or dilute shareholder value by doing many secondary offerings -- and turn out to be lousy investments. But the fact that they all have well-stocked pipelines gives them an edge over other drugmakers.

And if they're able to get just one drug approved, then watch out, because their stock is likely to take off like a rocket. All you have to do is look at the market cap of a one-drug wonder like Onyx Pharmaceuticals or Amylin Pharmaceuticals to realize that these developmental-stage drugmakers have a long way to run if they can get just a single successful drug approved. And that's what makes investing in biotech so much fun.

Exelixis, InterMune, and Array BioPharma are all Motley Fool Rule Breakers picks. To see why our high-growth newsletter picked these companies, and to see all our current stock recommendations, grab a free 30-day trial subscription to the newsletter. 

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Exelixis. Glaxo is a selection of the Income Investor newsletter. The Fool's disclosure policy is constantly developing something.