Editor's note: This is a special bonus from Stocks Under $10. For more information about this service and to subscribe, click here.

The front page of this morning's

Wall Street Journal

features an article highlighting the risks that Big Pharma faces over the next five years as many drugs come off patent. Some of the companies mentioned negatively in the piece are

Merck

(MRK) - Get Report

,

Pfizer

(PFE) - Get Report

,

Eli Lilly

(LLY) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

Bristol-Myers Squibb

(BMY) - Get Report

.

The article says generics are expected to wipe out $67 billion from Big Pharma revenue between 2007 and 2012. This is almost half of the combined revenue from Big Pharma in 2007.

Also, the article mentions the strong appeal of biotech drugs, given that they face no competition from generics and that big pharma has spent nearly $76 billion acquiring biotech companies since 2005. The data were provided by Health Care M&A Information Services.

What's not mentioned in the article is the amount of cash spent on partnerships. Instead of acquiring biotech stocks outright, large pharma companies sometimes elect to take positions in small-cap biotechs. These stakes end up being just a drop in the bucket for big pharma, but the cash infusion usually results in a price jolt for small-cap biotechs -- as we saw with a 25%-plus move in one of our positions in the Stocks Under $10 model portfolio a few months back.

This supports a thesis we've held for a year: The small-cap biotech sector is ripe for takeovers as Big Pharma faces a tough growth period. Thus far, we have done very well with our few biotech picks, including a 35% gain from one just this week and a takeover of another. Overall, the model portfolio is up 15% year to date compared to the benchmark Russell 2000.

As we said to our Stocks Under $10 subscribers, our thesis is to avoid the names whose drug candidates are in phase III, or late-stage, studies and instead focus on earlier-stage companies that have existing partnerships with Big Pharma. These are the companies most likely to be acquired. They also carry less downside risk than the typical Phase III hit-or-miss investment.

We have a screen of small-cap single-digit stocks that have the potential for significant price appreciation. We're still in the research phase, but intend to pick a few favorites over the next two weeks.

Editor's note: This is a special bonus from Stocks Under $10. For more information about this service and to subscribe, click here.

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes

TheStreet.com Stocks Under $10

. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;

click here

to send him an email.