Could These 2 Biotech Stocks Really Double Your Money?

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Investment-bank analysts have been slapping lofty price targets on small-cap biotech stocks recently. More than a few targets I've seen recently suggest you could easily double your money or better.

Before you plunk down any of your hard-earned savings, it's important to understand a couple of things about biotech stock price targets. First, high targets get more attention and less hate mail, so you should always take them with a grain of salt. Also, arriving at a price target generally involves some fancy math to account for the odds an upcoming catalyst will spark a huge rally or lead to a vicious sell-off.

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Adamas Biopharmaceuticals Inc. (NASDAQ: ADMS), and Insmed Incorporated (NASDAQ: INSM) face some pretty big catalysts that could more than double their prices, according to some investment-bank analysts. Here's a look at what needs to go right, and what could go wrong.

1. Adamas Pharmaceuticals Inc.: Convenience play

According to Cowen and Co., this biotech's recent rally could be just the beginning. This stock shot up to about $21 after the FDA approved Gocovri (formerly ADS-5102) for the treatment of dyskinesia caused by Parkinson's disease, but the bank thinks $55 is a fair price given the drug's sales potential.

To hit Cowen's price target, Adamas' market cap needs to rise from around $475 million at recent prices to around $1.2 billion. Biotechs generally trade at mid-single-digit multiples of their annual sales figures, which suggests annual Gocovri sales need to hit around $240 million to make successful soothsayers out of Cowen's analysts.

Levodopa-induced involuntary movement interferes with the lives of approximately 150,000 to 200,000 Americans living with Parkinson's, and Gocovri is the first drug specifically approved to treat them. At a wholesale acquisition price as high as $30,000 per year, it looks as if annual Gocovri sales could reach $450 million if it becomes the go-to drug for just one-tenth of its addressable population.

Before you run out and buy all the Adamas stock you can get your hands on, there's something you should understand about the competition. Gocovri is simply a longer-lasting version of cheap generic amantadine, a drug that's been in use for the past 50 years.

Adamas contends slowly releasing amantadine increases its efficacy, but clinical trials supporting its application compared it to a placebo. Without a head-to-head comparison showing a clear advantage over a generic option that costs pennies, it's hard to imagine end payers will be willing to shell out thousands for Gocovri.

New drug launches can be more unpredictable than clinical trial outcomes. If Gocovri sales don't take flight in the quarters ahead, investors buying up shares right now could lose a bundle.

2. Insmed Incorporated: Direct delivery

Analysts at Evercore ISI think an antibiotic this company has in a late-stage clinical trial could be worth enough to raise this company's market cap from about $767 million at recent prices to $1.75 billion. If the FDA and end payers can look past mixed results from a mid-stage study with Insmed's lead candidate.

Non-tuberculous mycobacteria lung infections are on the rise, and they're hard to get rid of. Harsh side effects prevent plenty of patients from achieving success with standard antibiotic cocktails that can take years to eradicate the bacteria from their lungs. Insmed's lead candidate, Arikayce is an inhaled version of an old antibiotic typically administered through an intravenous infusion called amikacin.

Insmed argues that direct delivery of amikacin to infected lung tissue increases efficacy with fewer side effects. That's a combination for success that would probably lead to around $500 million in annual Arikayce sales, and help the company's stock price more than double in the process.

As is often the case when a price target is much higher than the present price, there's a big reason to be nervous. In a previous trial, Arikayce failed to significantly lower mycobacterial density compared to standard treatment, which was the trial's main goal. Luckily, the candidate significantly increased the rate of culture conversion to negative, which was the trial's secondary goal.

As you can imagine, Insmed designed the ongoing pivotal trial, named Convert, to highlight Arikayce's strengths by using culture conversion to negative as the primary endpoint, plus a handful of tweaks concerning patient selection. I think the adjustments will work in the antibiotic's favor, but there are no guarantees. If adjustments to the Convert trial somehow result in another primary endpoint miss, this clinical-stage biotech stock would plummet. You won't have to endure the suspense much longer. Insmed expects to report results from the Convert trial sometime in September.

You won't have to endure the suspense much longer. Insmed expects to report results from the Convert trial sometime in September.

Foolish takeaway

If I had to choose between these two, I'd probably lean toward Insmed. Investment-bank price targets for small-cap biotech stocks rely heavily on perceived chances of success, and I think the odds are stacked more heavily against a successful launch for Gocovri than Cowen does. Cheap generic drugs reformulated to last longer in the bloodstream have enjoyed successful launches, but I think Adamas' sales force will have a hard time justifying Gocovri's extra expense without stellar outcome data.

Insmed has a long road ahead with Arikayce, but I think the FDA will overlook mixed data from the mid-stage study. If the candidate can significantly raise the percentage of patients whose tissue cultures begin reading negative for infections, it would show hospital operators the antibiotic represents a clear opportunity to get more of their chronic lung infection patients out the door and lower the chances of readmitting them later.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.