2 Biotech Companies With Multi-Bagger Potential

Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some investors consider speculation to be a dirty word, but it can be an important component of a diversified portfolio. Although speculative stocks have an increased level of risk, they also have enormous reward potential. The following four keys will allow you to improve your chances of hitting a home run with speculative stocks, while ensuring that your portfolio is protected:

1.) Limit your speculative holdings to between 10% to 15% of your portfolio, depending on your level of experience and familiarity with the companies.

2.) Include an adequate number of speculative stocks to ensure that you are not risking too much on any single holding.

3.) Conduct extensive research in each company that you are considering investing in to ensure that the chances of success far exceed the chances of failure.

4.) Monitor the progress of each speculative holding regularly to verify that it is on the track to success, and if not, consider selling the position.

Biotechnology, a great way to speculate

The biotechnology industry has some excellent speculative investment opportunities to consider. When a biotech company reaches sustained profitability, investors can achieve phenomenal returns, as was the case with Celgene (NASDAQ: CELG).

Celgene has been profitable for about a decade and has achieved impressive growth over this period, resulting in gains of over 1,800%. Revlimid, Celgene's blockbuster product that treats multiple myeloma, helped pave the way for the creation of several successful new products and an impressive pipeline.

I recommend Celgene as an investment today, but I am also aware of two relatively small, speculative biotech companies that offer potential returns similar to those that Celgene's investors have enjoyed.

Speculative opportunities

Exelixis (NASDAQ: EXEL) is a biotech company that develops small molecule therapies for the treatment of cancer. Up to this point, Exelixis has not achieved profitability, and sales have consisted of royalties received as part of collaborations from leading pharmaceutical and biotechnology companies. These royalties could become significant in the future if any of the products developed as part of these collaborations become successful.

Exelixis' upcoming research efforts will be focused on the development of Cabozantinib to treat various forms of cancer. Exelixis has enormous upcoming potential, with an indication of Cabozantinib currently in phase III clinical trials for the treatment of prostate cancer. 

Exelixis was founded in 1994 and after 19 years of hard work, the company finally has an approved product with Cometriq, which is an indication of Cabozantinab that was approved in November 2012 to treat medullary thyroid cancer. Cometriq has minimal commercial potential due to a limited number of applications, but the approval was huge for Exelixis, because it proves that they have the ability to take a product from inception to commercialization.

In addition to these two indications, Exelixis has many other potential indications of Cabozantinib, including breast cancer, lung cancer, and pancreatic cancer. Many analysts believe that Cabozantinib has blockbuster potential. In fact, Exelixis believes in this product so much that it decided to postpone the development of a large number of potential drugs in order to concentrate exclusively on the development of Cabozantinib.

Although Exelixis has enormous potential, I consider it to be a speculative stock because it is possible that upcoming approvals for Cabozantinib will not be obtained, or that competition will significantly outperform the product. However, the potential rewards significantly outweigh the risks.

Vertex Pharmaceuticals (NASDAQ: VRTX) is a biotechnology company that discovers, develops, manufactures, and sells pharmaceutical products. Vertex has two existing products, Incivek for the treatment of the hepatitis C virus, and Kalydeco for the treatment of cystic fibrosis. Incivek's 2012 sales were $1.16 billion, representing an increase of 22% over 2011, which was the year in which Incivek was commercialized. Kalydeco was approved in 2012 and had annual sales of $172 Million.

The approval of these two products were important milestones for Vertex, and will provide the financial resources needed to develop additional commercialized products. Vertex has an impressive pipeline of drugs in various stages of clinical development for the treatment of hepatitis C, cystic fibrosis, autoimmune diseases, and influenza.

Vertex is on the verge of sustained profitability and is in a similar position to that of Celgene's a decade ago. However, Vertex still needs to prove that it can maintain profitability and come up with a blockbuster, similar to Celgene's Revlimid. 

The Foolish bottom line

Exelixis and Vertex both have accomplished the daunting task of commercializing a product, which is a vital first step in becoming a major biotechnology company with sustained profitability. Although they have a long way to go to become the next Celgene, I believe that Exelixis and Vertex Pharmaceuticals are each heading in the right direction, and I recommend these two companies as potential additions to a diverse group of speculative holdings.

Greg Williamson owns shares of Vertex Pharmaceuticals, Exelixis, and Celgene. The Motley Fool recommends Exelixis and Vertex Pharmaceuticals. The Motley Fool owns shares of Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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