3 Biotech Stocks With Explosive Upside Potential

By Markets Fool.com

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The biotech sector is a great hunting ground for investors who are afterstocks that offer massive upside. If you buy shares in a company that goes on to create a blockbuster drug, the returns can belife-changing.

Of course, stocks that offer up extreme upside potential also tend to be fraught with risk, so potential investors need to be quite picky about which companies they choose to buy. With that in mind, here's a list of three companies that risk-loving long-term-minded investors might want to consider giving a closer look.

1. ACADIA Pharmaceuticals

First up isAcadia (NASDAQ: ACAD), acompany that is in the middle of transitioning from a clinical-stage company into a commercial one, which can be a difficult transition topull off.

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Acadia's upside potential rests solely in the hands of a single drug, called Nuplazid, which was just recently launched as a treatment for Parkinson's disease psychosis, or PDP. This disease causes patients who have Parkinson's to hallucinate and experience delusions, which makes it exceedingly difficult to care for them. That forces many people who develop PDP to be placed in nursing homes, increasing the cost of their care.

Acadia's Nuplazid promises to help ease that burden, and it's thefirst and only FDA-approved drug that treats PDP. Roughly 400,000 patients in the U.S. suffer from PDP, and Acadia has set a wholesale price of $23,400 annually. Acadiais also currently studying Nuplazid as a potential treatment for Alzheimer's disease psychosis and for schizophrenia.

Sales of Nuplazid got off to a slower-than-hoped-for start, but that's no surprise since the company is still giving out free samples while it establishes reimbursement agreements. Acadia's market cap is about $3.5 billion right now, and I see huge upside potential from there if Nuplazid can live up to its full potential.

2. Radius Health

Up next is Radius Health (NASDAQ: RDUS), a biopharma that is focused on diseases of the bone. The company's most important product candidate is named abaloparatide-SC. In late-stageclinical trials, patients who used this drug showed a 86% decrease in their risk of developing a spine fracture compared to the placebo group. Since more than 2 million osteoporosis-related bone fractures occur annually in the U.S. alone, abaloparatide-SC could help to prevent a lot of trips to the emergency room.

Radius has already submitted abaloparatide-SC to U.S. and European regulators for review, which gives the company a number of near-term catalysts. The Committee for Medicinal Products for Human Use, a European Union body, should be issuing its opinion on the drug in late 2016 or early 2017, and the FDA has set an approval decision date of March 30, 2017.

The only potential knock againstabaloparatide-SC is that it requires a daily injection, whereas an experimental drug from biotech giant Amgen has shownclinicalgains from a once-a-month injection. To help offset that potential negative, Radius is already developingabaloparatide-TC, which administers the drug through a transdermal patch instead of an injection and is in phase 2development right now.

Peak salesestimatesfor abaloparatide are tough to judge given the huge patient population, but some analysts peg its potential in excess of a billion dollars annually. That suggests there could beupside from today's valuation if regulators give the drug the green light.

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3. Sarepta Therapeutics

Rounding out today's list is Sarepta Therapeutics (NASDAQ: SRPT), a clinical-stage biotech primarily focused on rare diseases.

Sarepta's most important compound is called eteplirsen, which could hopefully treat the deadly muscle-wasting disease Duchenne muscular dystrophy, or DMD. Right now there are no approved treatments for this awful disease in the U.S., although a handful of companies have made attempts to get the green light over the past year. Of these companies, only Sarepta is still in the running.

Of course, it's quite hard to handicap the company's chances of success. On the one hand, during the FDA's advisory committee meeting to discusseteplirsen, a lot of criticism was lobbed at Sarepta for itsmethodology used to collect data in its clinical trial. On the other hand, there's a clear unmet medical need for a drug that helps to treat DMD, and eteplirsen is the last drug still standing.

Despite the negative comments made during the advisory committee meeting, the FDA has twice delayed its decision data on eteplirsen, and it recentlyrequested datafrom the company's ongoing confirmatory study.The agency wants to see more data regarding the drug's ability to restore production of dystrophin, a protein important in muscle function, in patients with DMD. If the FDA sees data that convinces them thateteplirsen helps to restore dystrophin levels, then they may be willing to give the drug the go-ahead.

Sarepta's share price has been unbelievably volatile over the past year given the never-ending string of news, but the company's current market cap of roughly $1.3 billion will look tiny if everything goes according to plan.

Are any worth buying?

All three of these stocks are high-risk, high-reward propositions, so I'd advise investors to approach all three with caution. However, if forced to choose, I'd have to say that Acadia is my favorite stock of this group since it's already sailed through the regulatory approval process. In addition, I'm also encouraged that Nuplazid will have the PDP market all to itself, which gives the drug automatic demand. If management can successfully execute on its commercialization strategy, then I could easily see shareholders making out like bandits.

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Brian Feroldi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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