It’s no secret that one of the strongest raging bull markets of our lifetime is taking place. At the start of 2018, the bull market was almost nine years old. Many investors have seen massive gains as the Dow Jones Industrial Average and S&P 500 have rallied over 300% from their panic selling lows in 2009 when the recession fears were at their highest. Now many investors are looking for new ideas on how to position themselves for the rest of this year and beyond.

The world of biotech is a frequent destination for investors who are looking for outsized gains over the broader market indexes. After all, coming up with a new cancer treatment, a new heart disease treatment or a new cognitive preservation drug, or treating many of the less common diseases with no cures, can literally take a company from zero revenues to hundreds of millions or even billions of dollars in revenues.

This year is shaping up to be a stellar one for biotech. Investors are looking for growth and upside, and that can drive the interest in biotechs ever higher.

24/7 Wall St. looks for many emerging biotech outfits that could rise 50%, 100% or even rise exponentially. It is important for investors to focus on companies that have promise, and perhaps it is equally important to understand that companies that have had years of disappointments often keep disappointing investors.

Some of the recent headlines about biotech and emerging pharma should pretty much represent the current bullish optimism for the segment:

• On January 26, Barron’s wrote “Biotech Ready to Bust Out” and Dow Jones wrote “Biotech Investors Cured of Worry.”
• Dow Jones also wrote in a health care roundup “Health Care Higher After Strong Biotech Earnings” on January 25. Also on January 25, TheStreet wrote “Why 2018 Will Be Better for Biotech Deals Than 2017.”
• On January 22 MarketWatch wrote “Biotech ETF Rallies On Merger News, On Track For Highest Close Since 2015.”
• And on December 19, 2017, Investors Business Daily wrote “Why These Biotech Stocks Could Be Taken Over In 2018.”

The biotechs are looking ripe for M&A activity in 2018 as well. Our formal biotech forecast for our daily and weekend email readers on January 6 said, “There should be multiple deals announced in the first 4 months of 2018, with a focus on companies with multiple pipelines that can be acquired in the $500 million to $8 billion range.” We have already seen companies like Juno Therapeutics being acquired by Celgene for $9 billion, and Bioverative has been given an $11.6 billion acquisition by Sanofi. And an even larger deal from 2017 was Gilead’s diversification acquisition of Kite Pharma for almost $12 billion in 2017, preceded by Johnson & Johnson’s $30 billion acquisition of Actelion in the same year.

Many more drug companies and top biotech leaders are loaded with cash. 24/7 Wall St. recently identified how just 16 companies had a total of $1 trillion in cash, and at least four of those were biotech and pharma giants. Those that have spent much of their cash on deals could also easily tap the debt market or could choose to make stock-for-stock acquisitions.

With biotech stocks that could rise 50, 100% or even exponentially, some safeguards need to be strongly considered. If a company just experienced a major sell-off and Wall Street analysts insist that their bullish thesis is right, these need at least some caution. If a company does not have a market cap of $100 million or more, it should be treated with more scrutiny than an established biotech that already has drug sales with a market value in the hundreds of millions or billions. And if a company is widely speculated to be a bust, then investors need to use major scrutiny.

It is important to understand that these are not formal predictions. They are currently the most promising biotech and emerging pharma companies with catalysts ahead that could lead to massive drug sales or buyouts from larger biotech and pharma outfits. We have used some Wall Street analyst notes to assist in price targets, and consensus analyst price targets are from Thomson Reuters. And for a final risk and warning, investors need to know that bad news of any kind can lead to a biotech outfit’s death march — and sometimes that bad news may seem good on the surface.

Eiger: Can It Climb Back or Will It Be Sanctioned?

Eiger BioPharmaceuticals Inc. (NASDAQ: EIGR) is no stranger to being called a potential double, but it also recently reminded speculative investors that there are lessons to be learned and trading rules that should be followed in this space. Its stock was highlighted as one that rise exponentially after analysts put their price targets up in the $20s and $30s in 2017, and Ladenburg Thalmann issued a new Buy rating and $32 target early in January. That would have implied another 100% upside, even after Eiger had risen more than 100% from when we first highlighted the stock. But that was then. A disappointing drug study caught investors by surprise in January, sending the stock down from about $16 to $8 overnight, before recently recovering back to $9.

Eiger is a tiny outfit with a $95 million market value, and in 2016 it closed an acquisition of Celladon ahead of its $16 per share IPO price. This stock has gone from low expectations to hot and back. Its Phase 2 LIBERTY Study in pulmonary arterial hypertension failed to meet its primary endpoint in January. What matters now is that Eiger is not out of the game as it has four drug candidates in Phase 2 studies: two targeting hepatitis delta, one targeting post-bariatric hypoglycemia and one targeting lymphedema.

It cannot be overlooked that Eiger recently destroyed many speculative investors’ hopes. That being said, its drug pipeline is robust enough that this company could have many avenues to success. And while investors should be scared that companies that deliver one big disappointment tend to have more big disappointments down the road, Eiger was a startup that was tied to Stanford’s SPARK program out in Palo Alto, California, and other key venture capital groups.

Trading at $9.00 now, Eiger BioPharma shares are down 35% so far in 2018. Its stock is still up from the first half of 2017, but its 52-week trading range of $6.10 to $16.20 should spell out that it has been risky and has burned some investors badly.

Flexion: Launching Non-Opioid Pain Relief

Flexion Therapeutics Inc. (NASDAQ: FLXN) is already worth $850 million. This company has a fresh FDA approval (October 2017) of Zilretta as an extended release non-opioid pain treatment in patients with osteoarthritis of the knee. The treatment has been available on a limited basis since October 23, and Flexion has already hired and trained over 100 field sales people to represent the drug, and they have already been deployed around the country. With the opioid addiction in America being so high, there is much potential upside here, and it could be argued that if Flexion received approval for osteoarthritis of the knee then it may have other potential approvals coming down the pipe.

The company recently showed that 95% of patients achieved clinical benefit after a single administration of Zilretta. Another driving force is potential for Flexion to be acquired. In fact, the company has been directly mentioned as a rumored biotech takeover target, and it was said to have received an offer in the “mid$30s” from Sanofi in early 2017 when its stock was lower.

Zilretta is a proprietary microparticle formulation of an FDA approved steroid that releases into the knee-joint. Analysts on Wall Street are targeting only about $30 million in expected 2018 sales, which seems like it has massive room for longer-term sales growth when you consider the size of the pain management market and consider that this is a non-opioid treatment. Prior to FDA approval, Janney had noted that Zilretta has potential to reach $350 million to $500 million in annual sales.

The share price is $23.50, and the 52-week range is $16.51 to $32.25, and the consensus target price is above $38. That’s about 60% in implied upside if the analysts are right. An even larger upside call came from Needham with a $42 price target last October. While the stock is up 25% from a year ago, Flexion shares have actually lost 6% of their value so far in 2018.

La Jolla Pharma: Treating the “Other Blood Pressure Problem”

La Jolla Pharmaceutical Co. (NASDAQ: LJPC) has a market cap of just over $800 million, and last seen at $36.50, the stock 52-week range is $16.71 to $39.28. Its consensus price target is also above $57, which implies potential upside of 56% from the pool of analysts covering the stock. This stock is nearing its $41 or so high briefly seen in September of 2015. Be advised that La Jolla Pharma already has doubled from its lows of 2017, so a lot of the good news may already be priced in here.

The big driver for La Jolla was highlighted by a 15% jump in its shares in December after the FDA approved its Giapreza as a new drug to increase blood pressure for patients who have low blood pressure. The company is training its own sales team and is expected to begin selling the drug early in 2018. Its target market may be hundreds of thousands of patients. Analysts are calling for the non-revenue company to reach $30 million or so in 2018 sales, but the potentiality for this drug alone could quite easily be exponentially higher.

SunTrust Robinson Humphrey recently called La Jolla one of four potential doubles when it issued a $65 target price along with its Buy rating for La Jolla, but Jefferies issued a post-approval target of just $40. That being said, even Jefferies sees Giapreza sales reaching almost $300 million in five years. This stock is up over 13% so far in 2018.

PLx Pharma: Building a Better Aspirin

PLx Pharma Inc. (NASDAQ: PLXP) is going to be rather risky due to its market value of just $63 million. Last seen at $7.20, the shares have a 52-week range of $5.60 to $12.80, and the stock is classified as low volume by traders. PLx Pharma is focused on developing nonsteroidal anti-inflammatory drugs and other pharmaceutical agents, and its lead product is Aspertec (325 mg) as a better formulation of aspirin that seeks to reduce acute gastrointestinal side effects while still providing antiplatelet effectiveness for cardiovascular disease prevention. In short, it’s looking to build a better aspirin.

PLx is preparing to launch its better aspirin under the Aspertec name in 2019. This is an alternative to enteric-coated aspirin that is used by about 90% of patients. Janney recently initiated coverage with an Outperform rating and a $14 fair value for PLx. The firm believes that Aspertec’s differentiation exceeds that of other over-the-counter consumer health care products (Airborne, MegaRed and Mucinex) that already have achieved commercial success.

Janney started the stock as Buy with a $14 fair value estimate (versus a $6.10 prior close). The firm noted that PLx is creating a branded over-the-counter health care franchise with a better aspirin for use as an antiplatelet agent. Janney’s report sees Aspertec sales hitting $100 million to $200 million, but it also thinks sales can reach $300 million or more:

After establishing Aspertec as the brand of choice among such specialists in the first few years of launch, PLx plans to implement a direct-to-consumer ad campaign to make the 50 million people taking aspirin aware of Aspertec. … We have confidence sales of Aspertec can reach $100-$200 million and may peak well in excess of $300 million. Considering existing independent OTC consumer healthcare companies trade in the range of 4X-6X sales, it suggests PLx has long-term potential that is far greater than its present $60 million market cap. Even after factoring in significant dilution that will result from raising capital needed to launch Aspertec and applying a 30% discount rate, we arrive at a fair value range of $10-$18 per share.

Ra Pharma: Treating Kidneys With Its Staff

Ra Pharmaceuticals Inc. (NASDAQ: RARX) was last seen at close to $7.50, with a market cap of $170 million. It was recently assumed in new coverage at Credit Suisse with an Outperform rating and a $16 price target in an outline of which biotechs could be takeover targets in 2018. The consensus target price is up at $25.00 but from just a handful of analysts. Keep in mind that the 52-week range of $7.15 to $27.84 implies that there already has been some pause in all that bullishness, even if Ra Pharma began dosing patients in a Phase 1b trial targeting renal (kidney) impairment. The stock lost one-third of its value in early December after investors wanted stronger news from the same drug candidate (RA101495 SC) that just wasn’t positive enough.

Ra Pharma has other candidates in its pipeline. In addition to RA101495 and the Ra Pharma collaboration with Merck, the company has discovery and preclinical programs. These include Factor D administered as an intravitreal injection for dry age-related macular degeneration and Factor D administered SC for C3 Glomerulonephritis and dense deposit disease. The company is also studying C1s inhibitors to potentially have a broad utility in a number of disease areas.

Syros: Riding Gene Control Therapies for Cancer and More

Syros Pharmaceuticals Inc. (NASDAQ: SYRS) has a $281 million market cap but despite a recent recovery it has been a painful stock for those who invested in the company in the first half of 2017 and who decided to not take some profits on the way up. Syros recently presented initial clinical data from its ongoing phase 2 study of SY-1425 in patients with genetically defined acute myeloid leukemia and myelodysplastic syndrome at the 2017 American Society of Hematology Meeting in December. After falling initially, the stock has recovered from $8 and lower to $10.70 on last look. In addition to SY-1425, Syros also presented new preclinical data for SY-1365 in hematologic cancers.

JMP Securities reiterated Syros as Market Outperform with a $33 price target after it announced a clinical supply agreement with Johnson & Johnson’s Janssen Research Development. The company will provide daratumumab for a combination study with SY-1425 in patients with acute myeloid leukemia and myelodysplastic syndromes, and JMP said at that time that Syros had a first-mover advantage in the gene control space and more specifically in the study and exploitation of super-enhancers. Immediately after the presentation, Oppenheimer reiterated its Outperform rating with a $28 price target. The Oppenheimer view is that Syros could start seeing revenue in 2019 and that it could grow to $510 million by 2021.

Syros has a consensus target price of $21.33. At $10.70, its shares are up 10% so far in 2018, but its 52-week range of $6.30 to $24.38 should outline how volatile this can be.

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It is very important for investors to understand the risks they take in any stock or sector. The biotech arena is among the riskiest for investors. It also offers some of the highest rewards. As of the close on Friday, January 26, the Nasdaq 100 is up more than 9%, compared with gains of over 7% for the Dow and S&P 500. The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) was up over 10.5%, and the SPDR S&P Biotech ETF (NYSE: XBI) was up more than 13% so far in 2017.

Enthusiasm over the biotech is huge at this time, but it would be irresponsible to not leave investors with the reminders that if a sector already has outperformed the broader market this much, there is little room for error. If a biotech company has everything riding on the future of one or two drug candidates, it can be incredibly painful if it delivers bad news. In fact, some emerging pharma companies and clinical stage biotechs see their shares drop 50%, 75% or even worse if they deliver bad news on a top drug candidate.

The world of speculative biotech and emerging pharma stocks is riddled with the constant reminders of “caveat emptor.” It is important to look at how high the short interest is to see if there are big bets against the company from what may be considered “smart money” investors. And it’s important to treat stocks that do not have tradable stock options so that would-be gains can be protected or so that downside can be hedged. And as a final warning, stop-loss limits of 10% or 20% don’t do you any good if the stock gaps down 60% overnight after bad news.

More hot and potential biotech winners will be shown in the coming weeks.

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