2 Speculative Biotechs That Could Be Well Worth the Risk

Biotech stocks can produce stunning returns in short order, especially clinical-stage companies working on game-changing drugs or medical devices. These stocks are some of the riskier types of assets, though, frequently plummeting on negative clinical or regulatory news.

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That's why investors need to carefully assess a biotech's risk-to-reward ratio prior to purchasing shares. Said plainly, the reward needs to far outweigh the risk of potentially losing most, if not all, of your investment.

Right now, I personally think Celladon Corp. andExelixis are two small-cap biotechs with favorable risk-to-reward ratios worth a deeper look by risk-tolerant investors. Here's why.

Celladon is developing a game-changing heart failure treatmentCelladon is a gene-therapy company developing novel treatments for heart disease. The biotech's lead product candidate, Mydicar, is presently in a large midstage trial for systolic heart failure, with topline results expected by the end of this month.

The basic idea is to get heart cells to produce adequate amounts of a critical enzyme called SERCA2a that is involved in muscle contraction, and hence the global functioning of the heart. This enzyme is typically deficient in most heart failure patients, presumably leading to a steady decline in the heart's ability to pump blood.

Celladon looks like an intriguing speculative stock, to me, because there are essentially no disease-modifying treatments for this unmet medical need. There are also an estimated 700,000 patients living with systolic heart failure in the U.S. and EU right now.

As such, the company wouldn't have to resort to the eye-popping pricing structures common among enzyme replacement therapies for Mydicar to reach blockbuster status. And the dire need for new treatments should translate into a rapid market uptake with only a modest sales force, if it gains regulatory approval.

The downside, though, is that Celladon doesn't have much to offer investors beyond Mydicar at the moment.

Having said that, I'm cautiously optimistic that Mydicar will prove to be an important new treatment since multiple big pharmas, such asPfizer,Johnson & Johnson, andNovartis,aremajor stakeholders in this tiny biotech. And Bristol-Myers Squibb decided to join the gene-therapy party recently by investing roughly $100 million inuniQure N.V.for its competing platform.

Put simply, I have a hard time believing that big pharma would invest so heavily in this technology if they weren't fairly sure it would lead to a commercial product. Of course, there are certainly no guarantees when it comes to drug development, but this blessing from nearly every top pharma company in the world speaks volumes, in my opinion.

Exelixis has multiple upcoming catalysts that could drive shares much higherShares of Exelixis have already started to run this year, rising by an impressive 111%:

However, this stock could push much higher, fueled by two major clinical and regulatory catalysts.

Up first, Exelixis is expected to release topline results for its lead product candidate, cabozantinib (Cometriq), as a potential treatment foradvanced renal cell carcinoma (RCC) sometime in the second quarter. While this indication wouldn't generate blockbuster-type numbers for the company, it should still see peak sales in the hundreds of millions given that RCC is now one of the most common forms of cancer in men and women in the U.S., and there is a clear need for new treatment options.

The Food and Drug Administration, or FDA, even granted cabozantinib Fast Track status earlier this month for this indication, showing that cabozantinib could indeed fill a vital gap in the current standard of care for patients afflicted with RCC.

Although somewhere around 40% of cancer drugs flame out in late-stage trials, I think cabozantinib has a fairly good shot at meeting its primary endpoint of increasing progression-free survival, or PFS, in RCC patients. First off, cabozantinib has shown decent anti-tumor properties in multiple cancers at this point, and PFS tends to be a relatively easier endpoint to meet than overall survival -- which is a secondary endpoint in this ongoing trial.

Turning to the next major catalyst, Exelixis and its marketing partner Roche should hear the regulatory fate of their metastatic melanoma combo therapy consisting of cobimetinib and Zelborafby Aug. 11 from the FDA. As the combo therapy reportedly led to a statistically significant increase of 3.7 months compared to patients receiving a monotherapy of Zelboraf, I believe the FDA will give it the green light come August.

Are these speculative biotechs worth the risk?Celladon and Exelixis are undoubtedly risky stocks. If they fail to achieve their clinical and regulatory goals over the next few months, their share prices will suffer in a big way.

In Celladon's case, though, the company is pursing a major unmet medical need with the potential to generate billions in sales. Although estimates vary, the low ball projection for Mydicar's first indication still tops $1 billion in peak sales, more than double the company's current market cap.

Exelixis, on the other hand, is looking to add somewhere around $200 to $300 million in peak revenues to its outlook, if everything with cabozantinib andcobimetinib goes according to plan. That's a noteworthy uptick in revenue for a company sporting a market cap of less than $600 million.

Overall, I wouldn't recommend buying a huge amount of either stock, but a small position might be advisable given that both of these small-cap biotechs could soar if their experimental therapies do turn out to be important new treatment options.

The article 2 Speculative Biotechs That Could Be Well Worth the Risk originally appeared on Fool.com.

George Budwell has no position in any stocks mentioned. The Motley Fool recommends 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.