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3 Biotech Stocks That Turned $1,000 Into More Than $5,000 This Year

It's been a banner year for anyone who started 2017 holding shares of AVEO Pharmaceuticals, Inc. (NASDAQ: AVEO)XOMA Corporation (NASDAQ: XOMA), or Dynavax Technologies Corporation (NASDAQ: DVAX). All three of these stocks have risen more than 400% this year, and there are still a couple of months to go.

You should never buy stocks just because they're going up, but understanding why they spiked can help you decide if there's more upside ahead. Here's a closer look at what lit a fire under these rockets, and what needs to happen for their respective rallies to continue.

Image source: Getty Images.

1. AVEO Pharmaceuticals, Inc.: Finally following instructions

This biotech stock took off this summer as a cancer pill the FDA rejected a few years ago finally made some progress in the EU. Years ago, the FDA didn't like the trial protocol underpinning tivozanib's application and asked the company to run another study to address these concerns.

The stock was hammered flat because management chose to keep investors in the dark and ignore the agency's request. Now that a new management team is producing the sort of data regulators wanted to see in the first place, though, investors have returned in force.

Aveo's price surged after tivozanib earned approval in the EU to be marketed as Fotivda for the treatment of kidney cancer. Although it's gained around 427% this year, the stock could get another big lift in the months ahead. To please U.S. regulators, the company is testing the drug in a head-to-head study against Nexavar that could throw off important data early next year.

Aveo's candidate recently passed the pivotal trial's pre-planned futility analysis. That means the trial will continue, but it wasn't the best possible news. Clinical trials with new cancer drug candidates that go on to be huge successes often show statistically significant survival benefits early enough to end trials immediately following interim analyses so patients in the control group can benefit as well.  

With a handful of recently launched kidney cancer drugs to compete with, Fotivda's peak sales potential might not be huge, but neither is Aveo's recent market cap of about $337 million. A positive result from the ongoing pivotal study would lift the stock much further. With little else in the pipeline, though, another failure would probably crush it into dust.

Image source: Getty Images.

2. XOMA Corporation: A great deal

This red-hot biotech's 420% run this year gathered steam in late August, after the company announced a transformational deal with Novartis (NYSE: NVS). The Swiss pharma giant handed Xoma $31 million up front for rights to gevokizumab, a once-failed anti-inflammatory candidate, and canakinumab for cardiovascular conditions. Xoma is eligible to receive up to $438 million in milestone payments if gevokizumab succeeds in clinical and commercial settings, plus royalties on any potential sales of either drug. In addition to bolstering Xoma's balance sheet with a cash injection, Novartis will also settle a $13.5 billion loan that will reduce the company's outstanding debt load by about 49% overnight.

Before you get too excited about the latest Novartis deal, it's important to remember success for gevokizumab is far from certain. In 2015, gevokizumab failed to show a significant benefit among patients with a rare, vision-robbing inflammatory disorder. 

Luckily, Xoma's takes a shots-on-goal approach to mitigating risk and has several candidates in clinical trials funded by partners with deeper pockets. At recent prices, the company sports a tiny $167 million market cap that would increase several times over the long run if a collaboration partner successfully launches just one or two candidates.

3. Dynavax Technologies Corporation: Waiting for an update

This clinical-stage biotech climbed in July after an independent advisory committee vote soothed a major concern. Clinical trial data supporting the company's experimental hepatitis B vaccine proves it's effective, but a safety issue caused the FDA to reject a previous application. Now that an independent advisory panel has voted overwhelmingly in favor of approving Heplisav-B, despite a handful of dangerous blood clots observed among thousands of patients given the vaccine, an eventual approval seems likely.

The FDA pushed back its review of the Heplisav-B application to allow the company to submit plans for a post-marketing safety study. The agency doesn't need to follow the advice of the advisory panel, but it usually does. Also, I can't remember the last time the FDA made a big deal about a post-marketing study for a drug and then refused to approve its marketing application.

While Dynavax stock would probably rise again if the FDA accepts its post-marketing study protocol, a successful launch could make this a multibagger over the long run. The vaccine could put up peak annual sales of around $700 million if it finally earns an approval. Biotech stock prices typically sport mid-single-digit multiples of total sales, which suggests this company's $1.13 billion market cap has much further to climb if it can successfully launch its long-awaited vaccine.

Image source: Getty Images.

A Foolish favorite?

All three of these biotech stocks have delivered outstanding gains this year, and all of them could also lead to swift and heavy losses. While the path is relatively clear for Dynavax and its lead candidate, we still don't know if Xoma's gevokizumab or Aveo's tivozanib will even produce the data needed to support an application. Should they pass the regulatory hurdle, they still face stiff competition from recently launched drugs for their intended indications. 

If I had to choose which of the three is best positioned to continue climbing, I'd pick Dynavax. Although better-than-average odds of FDA approval for Heplisav-B are already baked into the stock's price, there's still plenty of potential upside in the years ahead if the company successfully launches its vaccine.

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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.