Biotechnology is among the most exciting and lucrative sectors for investors. Perhaps the only market that provides greater volatility and profit potential is the derivatives market. 

With prices driven at a breakneck pace by research and FDA approvals, today’s golden company can be tomorrow’s stock market disaster. But the opposite has also proven to be true.  Sometimes the forgotten dogs of the biotech world can quickly morph into great long-term investments. 

I have identified 3 biotech companies that have fallen on hard times, but have recently experienced a rash of buying by large stock market players. Make no mistake, these stocks are very risky, but they have tremendous upside potential, and clearly I am not the only one who thinks so.

What Caused The 2016 Biotech Bear Market?
If you own biotech stocks, you know that 2016 was a difficult year for the segment. Riding high from averaging 34% annual returns from 2012 to 2015, the biotechnology index gave up 16% in 2016. And the 16% loss included a substantial recovery from the devastating plunge of 28% in January 2016. 

#-ad_banner-#The primary cause of the 2016 biotech bear market was shifting investor sentiment. Fear of new regulations that could force prices lower sent worried investors onto the sidelines. 

In addition, the biotech plunge occurred simultaneously as the FDA drug approval rate dropped from 38 annually in 2012 to just 22 in 2015. With fewer blockbuster approvals hitting the market, biotech hype faded. 

The good news is that the biotech sector is rebounding from this rout. Investors entered the year with much lower expectations, an approach that so far has worked in their favor. The sector has bounced higher by around 20% and appears primed to continue its winning ways this year. 

Following The Big Money
There are funds and large individual speculators who specialize in the biotech space. These big investors conduct extensive due diligence and vetting, far beyond the capacity of the average individual. Tremendous value exists in riding the coattails of these experts. 

Mark Lampert’s BVF Partners L.P., an approximately $1 billion, San Francisco-based private investment partnership, is among the leading names in the biotech investment world. BVF specializes in fundamental-driven public biotechnology investments. The fund recently revealed substantial holdings in three beat-down biotech stocks. 

These stocks look positively frightening to average investors. But obviously BVF Partners does not share the negative sentiment. Make no mistake, these stocks can continue to move lower, but BVF sees enough upside potential to be a major investor.

Where BVF Is Placing Their Bets This Year

1. BiolineRX (Nasdaq: BLRX)

This Israel-based cancer researcher boasts partnerships with major pharmaceutical companies like Roche, Novartis, and Merck. However, despite the support of the giants, the company is facing being delisted from the Nasdaq. Its shares trade for below $1.00, the minimum for a Nasdaq listing, due to a recent 34 million share offering that diluted price. BiolineRX has assured investors it will be back in compliance with the Nasdaq minimum by the July 24 deadline.

And it’s clear our “big money” firm believes them; BVF owns just over 18% of the company. Bullish excitement is surrounding the start of Phase 3 study of stem cell mobilization treatment. The company’s BL-8040 oncology platform is running and expected to grow this year. 

Now is the ideal time for risk-taking investors to enter long in BiolineRX.

2. OncoMed (Nasdaq: OMED)
This developer of cancer therapeutics has seen its share price slashed in half over the last month. Bearish news of Bayer opting out of licensing two of OncoMed’s drugs crushed the stock’s price, sending shares down to around $3.60. The stock is down another 50% from the bad news, after seeing its price collapse 66% in 2016. 

However BVF, OncoMed’s second-largest shareholder, remains confident. OncoMed has started an intense cost-cutting program, which includes eliminating half of its employees for $60 million in savings over the next 24 months. Provided the savings are as high as expected, the company has enough cash to operate through the third quarter of 2019. This does not count any additional revenue generated by current and possible future partners.

It is important to note that OncoMed has developed an extensive pipeline of investigational drugs focused on the fundamental biology driving cancer’s growth, resistance, recurrence, and metastasis. 

I view the difficult times as a fantastic buying opportunity for this cancer treatment innovator.

3. Forward Pharma (Nasdaq: FWP)
BVF owns nearly 1.4 million shares of this Denmark-based biotech, which targets the debilitating conditions of multiple sclerosis and psoriasis. Its core focus is on the immunomodulatory compound dimethyl fumarate (DMF) and its derivatives. 

Unlike the previous stocks on this list, shares are trading higher by over 7% this year and bucked 2016’s rout by advancing nearly 30% over the last 52 weeks. 

However, shares have recently given up approximately 35% at the end of March due to patent issues with Biogen, a competitor. Since the plunge, shares have built a solid technical base in the $19 per share-zone, setting up an ideal buy opportunity before the rebound.

Risks To Consider: The above list is in order from what I feel is the riskiest name of BVF’s holdings to the least risky. However, all three of the above stocks are only suitable for risk-embracing investors. Always keep in mind that even the big boys make mistakes and lose money when investing. 

Action To Take: All three of the above stocks have tremendous upside potential. With that said, risk equals reward in the investment world. Only use money that you can afford to lose when investing in these speculative biotech names.

Editor’s Note: Ignore the hype and cash in on the headline chaos with our Top 10 “win-win” Stocks for Trump’s first few years in office. Just prepare to be a little surprised…