3 Clinical-Stage Biotech Stocks with Explosive Upside Potential in 2015

By Markets Fool.com

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Source: Flickr via Idaho National Laboratory.

Biotech stocks have the uncanny ability to absolutely crush it following a positive clinical or regulatory catalyst. And this trend has been especially pronounced among standout clinical-stage companies over the past few years.

In 2014, for instance, we saw bluebird bio more than triple in share price after reporting positive early- to mid-stage study results for LentiGlobin BB305, a gene therapy indicated for a serious blood disorder called beta-thalassemia that results in insufficient oxygen uptake.

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In fact, the top 10 best-performing stocks in healthcare last year were essentially all developmental-stage companies, with the average gain coming in at a stellar 302%.

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Given the mind-blowing potential of clinically oriented biotech stocks to generate outsized gains, I think it's a good idea to have a watchlist composed of some of the more promising small to mid-cap companies. Of course, it's a lot easier to pick out past winners than future ones, but heading into 2015, I have a close eye on Dynavax Technologies Corp. , Celladon Corp. and Novavax . Here's why.

Dynavax's experimental hepatitis B vaccine could cause shares to take flight
Dynavax's drug development platform is based on the biology of Toll-like receptors, a group of proteins involved in the regulation of the innate immune system. To date, the company's pipeline has focused on targeting infectious and inflammatory diseases, as well as oncology.

The spotlight, though, is currently shining on Dynavax's experimental hepatitis B vaccine, Heplisav-B. After both the Food and Drug Administration and European regulators questioned the vaccine's safety profile because of a limited data set, Dynavax was forced to run a new, late-stage trial initiated in late 2014.

Not only is this new trial designed to detect rare adverse events, but it will also examine the vaccine's efficacy in particularly hard-to-treat sub-populations like type 2 diabetics -- potentially giving Heplisav-B a significant marketing advantage over GlaxoSmithKline's Engerix-B and Merck's Recombivax HB.

Heplisav's value proposition is relatively straightforward. As a niche but highly potent hep B vaccine, the vaccine is expected to generate somewhere around $700 million in peak sales, a figure that's roughly 40% higher than Dynavax's current market cap.

With the study expected to wrap up in the fourth quarter of 2015 and a new $40 million non-dilutive source of funding via Hercules Technology Growth Capital, Inc. in hand, Dynavax is certainly a stock worth watching this year.

Celladon's cardiovascular gene therapy platform is turning heads
Celladon is about a year out from its IPO, making it a relative newcomer to the world of public biotechs. Even so, its share price has bolted higher:

CLDN Chart

Investors appear to be flocking to this clinical-stage biotech right now for two reasons. First, Celladon's platform takes a gene therapy approach to the treatment of cardiovascular diseases. So the stock is probably piggybacking on bluebird's success in the gene therapy arena.

Second, the company's lead clinical candidate, Mydicar, indicated initially for systolic heart failure, is on track to report top-line results from its ongoing mid-stage study by April.

While it's frankly impossible to estimate Mydicar's value at this point, given that no comparable treatments presently exist, I think it's fair to say that it has blockbuster potential, simply because of the sheer lack of effective treatments for this fairly common condition.

Backing up this assertion, Wall Street clearly believes Celladon has huge upside potential. Namely, institutions have now gobbled up 50% of outstanding shares, and shorts have steadily marched out of this stock over the past six months.

CLDN Short Interest Chart

That is a rare combination for a developmental biotech heading into a major clinical catalyst, giving investors yet another good reason to keep this name at the top of their watchlist in 2015.

Novavax is developing an RSV vaccine with staggering commercial potential
Novavax is a recombinant nanoparticle vaccine maker with an eye on an extremely common disease with few treatment options -- namely, respiratory syncytial virus, or RSV. According to the World Health Organization, there are 64 million RSV cases each year, with the virus posing the most serious health risks to infants and the elderly. Unfortunately, noprophylactic vaccineexists for mostpatient types, except AstraZeneca's palivizumab, under the brand name Synagis, indicated forpre-term babies born before 35 weeks.

In the third quarter of this year, Novavax is expected to release data from its ongoing mid-stage study assessing the possibility and safety of a maternal immunization route for unborn infants using its RSV-F protein nanoparticle vaccineand aluminum phosphateadjuvant. Simply put, the idea is to vaccinate babies before birth, an idea the FDA apparently likes, given that the agency recently granted the vaccine fast-track status for this indication.

What's exciting from an investment standpoint is that Novavax's RSV-F vaccine could become a standard part of maternal care worldwide, dramatically increasing its potential target market. If this vaccine continues reporting positive safety and immune responses, I don't think it's far fetched to suggest that it could rival Pfizer's Prevnar for best-selling vaccine at some point. Time will tell if I'm right, but this is definitely a name to watch toward the latter part of the year.

Are any of these stocks screaming buys right now?
As clinical-stage biotechs, you should remember that these are high-risk types of investments that could crater if their lead experimental products flame out. That said, I'm most intrigued by Celladon's gene therapy approach, especially in light of Wall Street's apparent blessing. So personally, I'm thinking about buying shares ahead of its projected April data release for Mydicar.

The two vaccine makers also look like compelling buys, but it might be wise to wait until their clinical catalysts are closer at hand. That way, you stand a better change of avoiding unexpected downside surprises. Right now, I do own a small portion of Dynavax shares, but I don't have any plans on adding to this position until Heplisav clears another safety monitoring review.

The article 3 Clinical-Stage Biotech Stocks with Explosive Upside Potential in 2015 originally appeared on Fool.com.

George Budwell owns shares of Dynavax Technologies. The Motley Fool has no position in any of the stocks mentioned. 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.