3 Biotech Stocks to Avoid in 2013

Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars having rolled over to the new year, it's time we take a closer look at the biotech sector.

The biotech sector is never short of drama, with 137,949 studies currently under way, according to ClinicalTrials.gov, a National Institutes of Health database. Just as we examined three biotech companies to put on your buy list in 2013, I want to look at three biotech companies that I wouldn't invest in this year even if you gave me free money!

SynaGeva BioPharma
Avoiding SynaGeva really shouldn't come as a surprise to anyone since I referred to it as my one biotech stock to avoid in 2013 just last month. SynaGeva is approaching its research from a smart angle, tackling unmet clinical needs in order to exert a pricing monopoly on any FDA-approved drugs and virtually eliminating any chance of competition. Unfortunately, the company's phase 1/2 clinical-stage drug, SBC-102, for the treatment of lysosomal acid lipase deficiency, is its only clinical-stage drug at the moment. Synageva does have four additional preclinical trials under way, but that hardly justifies a very frothy $1.13 billion valuation.

According to research by Canaccord Genuity, SBC-102, even if it breezes through clinical trials, likely won't reach pharmacy shelves until late 2015 or early 2016. By then, SynaGeva, which has merely diluted shareholders with stock secondary offerings in order to raise cash, will be out of cash. With little in the way of clinical data expected this year, SynaGeva's bubble may finally be ready to burst.

Clovis Oncology
If you asked me three months ago if Clovis Oncology would have been a company to avoid in 2013, I almost certainly would have said "No" given the expectation for solid results from its phase 1/2 LEAP trial for CO-101, its metastatic pancreatic cancer drug, due out within a few months. That completely changed in November when Clovis' share price plunged after its data revealed that CO-101 was no more effective in extending overall survival than the placebo, Gemzar, which is manufactured by Eli Lilly .

Clovis' CEO, Patrick Mahaffy, noted that Clovis would halt development of CO-101 just days after Celgene reported data that its cancer blockbuster, Abraxane, when combined with Lilly's Gemzar, extended survival rates for those with pancreatic cancer.

Clovis' new strategy will be to focus its efforts on CO-1686, an early stage oral inhibitor to treat non-small-cell lung cancer, or NSCLC. I've said it before, and I'll say it again; small biotechs have an absolutely horrid track record at developing NSCLC drugs. Given that Clovis' LEAP trial setback burned even more cash, I estimate that even with $162 million in cash on its books, it could be out of cash within the next nine quarters unless it raises money through a secondary offering.

Forest Laboratories
There's just something about Forest Labs' motto, "A growing pharmaceuticals company" that just seems like false advertising to me. Forest Labs just might be the smallest big pharma company that's in a world of hurt in 2013. As of last year, two of its key drug -- Lexapro for depression, and Namenda for Alzheimer's -- accounted for three-quarters of all revenue. Lexapro lost its patent exclusivity last year, and Namenda is slated to lose its protection from generic competition in 2015. Unsurprisingly, Wall Street is expecting Forest's revenue to taper off by more than 30% this year.

Forest Labs has had some recent successes, receiving FDA approval of Linzess, an irritable bowel syndrome and constipation drug developed with Ironwood Pharmaceuticals , as well as the approval of Tudorza for the treatment of bronchospasms associated with COPD. Forest Labs' pipeline also boasts two new drug applications that have been filed, as well as four ongoing phase 3 trials. Still, these drugs are nowhere near the same blockbuster caliber of Lexapro in terms of sales. At nearly 29 times forward earnings, Forest Labs' shareholders have some soul searching to do in 2013.

Can this biotech repeat in 2013?
With Celgene's broad portfolio of drugs and a strong pipeline to boot, many investors see this as a smarter way to play the biotech investing game. While Celgene might be a safer stock than its small biotech brethren, investors need to know about the key opportunities and risks facing the company. We run through them all in The Motley Fool's brand new premium report on Celgene. To claim your copy today, simply click here now.

The article 3 Biotech Stocks to Avoid in 2013 originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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