Lessons From Biotech's Best Third Quarter Stocks

BOSTON ( TheStreet) -- The 10 best-performing biotech and drug stocks in the third quarter, according to CapitalIQ:

10. Celsion ( CLSN) 77%
9. Xenoport ( XNPT) 90%
8. Peregrine Pharmaceuticals ( PPHM) 90%
7. Sunesis Pharmaceuticals ( SNSS) 96%
6. Opexa Therapeutics ( OPXA) 111%
5. Stemcells ( STEM) 154%
4. Catalyst Pharmaceuticals ( CPRX) 185%
3. Hemispherx Biopharma ( HEB) 188%
2. Sarepta Therapeutics ( SRPT) 313%
1. Savient Pharmaceuticcals ( SVNT) 363%

Some lessons and observations from this list:

1. The biotech stock bubble grew bigger. StemCells up 154%? Irrational exuberance is reaching the red line any time a stem-cell company performs this well.

The same can be said for Opexa, a dead-ender that's burned through piles of shareholder cash on the futile development of the multiple sclerosis drug Tovaxin. It seems like some investors forget that Tovaxin failed a key phase II study in 2008. Tovaxin has toiled in purgatory ever since, although Opexa did change the drug's name to Tcelna. No doubt, the name change is worth millions in additional market cap.

The biotech sector is up almost 40% for the year, outperforming the broader stock indices. Warning: Stock market bubbles don't last forever. Success and easy profits are swelling the heads of traders who believe that all biotech stocks, no matter the quality, always go up. Judging by some of the biotech dreck on the list above, the sector is getting too frothy for its own good.

2. The "run-up" trading strategy is working. Hemispherx, Catalyst and Celsion owe their places on the third-quarter top returns list to traders buying ahead of key catalysts. For Hemispherx, it's a Dec. 20 FDA advisory panel for the chronic fatigue syndrome drug Ampligen. I'm no fan of Ampligen for reasons explained here. Likewise, Catalyst and Celsion are expected to release important results from respective late-stage clinical trials in the fourth quarter.

3. Sarepta was the feel-good story of the third quarter and it may reach rapturous levels later this month. On Monday, Sarepta shares rose another 6% on speculation over the meaning of this online registration form for a symposium to be held at the World Muscle Society meeting -- the venue for the presentation of 48-week data from the phase II study of eteplirsen in Duchenne muscular dystrophy.

I can't recall a more highly anticipated biotech event than the looming announcement of the eteplirsen data.

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