Biotech investing is awfully tricky. For every stock pick that performs well, a number of others blow up. From increasingly tough hurdles with clinical trials to the mercurial rulings of the Food & Drug Administration (FDA), it’s a field littered with landmines. And it often requires deep medical knowledge to gain an edge.

#-ad_banner-#That’s why I generally steer clear of the biotech industry. On occasion though, I suggest biotech stocks that look to have major upside — if the biotechnology is understandable, shows solid testing data and is getting close to possible FDA approval. These picks should never be a big part of your portfolio because of their high-risk nature, but they can be added on the margin to help juice gains when the occasional big gainer emerges.

Right now, I’m focusing on a biotech stock I first discussed in October 2011. Back then, I profiled three oncology stocks that had major upside. How have they done? Well, Medivation (Nasdaq: MDVN) and Threshold Pharmaceuticals (Nasdaq: THLD) are both up more than 400%.  And as I noted back in February, I think Threshold has even more upside ahead, perhaps past the $10 mark.

The laggard
But what about my third pick, Celsion (Nasdaq: CLSN)? I recommended it at a price of $2.75 back in October, and it eventually fell below $2 this past winter. This just shows you the risk of putting a lot of money into just one biotech stock. Your money could evaporate quickly. 

Yet this laggard now looks like it may have significant upside potential as well. In recent months, investors have started to see the strong potential for this company, and its shares are finally making headway, moving up roughly 50% since the month began.

If you think you’ve missed the move in this stock, then don’t fret. By my math, shares could double or even triple from here — if the cards fall into place.

ThermoDox
As I noted back in October, Celsion’s biotechnology — known as ThermoDox — helps in the treatment of cancer tumors by heating them up, enabling existing cancer drugs to work more effectively. ThermoDox has always delivered solid results in clinical trials, but this company was always a bit short on cash, repeatedly raising fresh funds to keep clinical trials going. Shares outstanding rose from 10.7 million in 2009 to a recent 33 million, bringing painful dilution to existing investors. Who wants to own a stock like that?

The good news: Celsion is getting closer to the finish line with its clinical trials and further dilution for this stock may be a lot more modest. Equally important, the company’s current $100 million market value sharply discounts the potential market opportunity for ThermoDox.

Targeting Hep C
Although ThermoDox could conceivably be used to target a wide range of cancer tumors, clinical trials have been focused on hepatocellular carcinoma (HCC), also known as liver cancer, which is often the result of a longstanding diagnosis of Hepatitis C. There are roughly 750,000 diagnoses of HCC worldwide annually, of which one-third could be treated with ThermoDox. The heat treatment is especially important in the HCC market because liver cancers are often right near major arteries, so cutting out a tumor brings the risk of major arterial damage. Indeed, a heavy amount of bleeding is the biggest cause of mortality after liver cancer surgery. 

Getting timely
Celsion continues to conduct Phase III trials, with stated plans to complete them by the fourth quarter. Analysts at Brean Murray note that “due to the potential ability of ThermoDox to reduce the recurrence rate in intermediate HCC patients, we are optimistic about its adoption as the future standard of care.” In effect, they say that if the FDA approves of the drug, then it could quickly gain traction among liver cancer surgeons. In addition, ThermoDox has “orphan drug” status, which means Celsion will be able to avoid generic competition for seven to 10 years.  

If ThermoDox hits the market, then sales could be in the tens or even hundreds of millions annually. As a rough guess, based purely on rates of HCC in various countries, ThermoDox could reach $20 million in annual sales in Japan later this decade. Europe and the United States could have about 50% more sales than that. 

Yet it’s China that could be the blockbuster market, simply because it has a much higher rate of liver disease. There are more than 400,000 new cases of liver cancer in Asia every year, so the revenue opportunity from that region could equal all other regions combined. 

A drug pre-approval test involving 200 patients is underway in China, and Celsion signed a deal with China’s  Zhenjian Hisun Pharmaceutical in May to manufacture ThermoDox in that country. Zhenjian Hisun is also funding the initial production of ThermoDox, which is being handled as a loan to Celsion. 

Brean Murray’s analysts have tallied up the potential revenue streams and say Celsion could earn more than $1 a share by 2015, even if further stock dilution takes the share count above 50 million. The forecasted growth in shares outstanding appears to incorporate a worst-case scenario, and the share count could end up closer to 40 million, pushing that earnings per share forecast higher.

In the past few sessions, this stock’s momentum had been blunted. We subsequently learned that the company has entered into a $10 million credit facility (which some investors must have had knowledge in advance). Shares always weaken whenever investors find out a company is raising capital, but often find a floor once the capital-raising is announced. The good news: the loan will not dilute the share count, highlighting management’s confidence that other, less painful ways to raise cash will likely be available in due time, whether through a licensing agreement or a share sale at a higher price.

Risks to Consider: Many drugs have looked like a “slam dunk” as they moved through clinical testing, only to have the FDA decline to grant final approval. As such, ThermoDox’s current strong testing data should be taken with a grain of salt. 

Action to Take –> After a strong run throughout June, shares of Celsion have seen a bit of profit-taking recently, falling more than 10% in the past few sessions. For those not yet in this stock, its recent $2.75 stock price is an even better entry point than before.

Brean Murray’s analysts have a $7 target price, though that comes with a 35% discount rate. If ThermoDox gets FDA approval, then that discount rate would be sharply lowered and shares could conceivably move toward the $10 mark, which would still value this company at less than $400 million, yet still be a gain of more than 260%.