When it comes to investing in pharmaceutical and biotech stocks, which can often be risky, traders need to focus on three key themes. 

First, a company should have ample cash on hand so investors need not worry about imminent dilution from a fresh issuance of new shares. Second, a company should be capable of laying out a path to profitability. And third, you need to spot catalysts that could push the share price higher. 

Put a check in all three of those boxes for Flamel Technologies (NASDAQ: FLML).

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Flamel Technologies is a specialty pharmaceutical company. It is unique in that it works with existing drugs, seeking out ways to deliver them more effectively through a set of proprietary drug delivery mechanisms:

— Medusa is a hydrogel-based formulation that delivers therapeutic proteins and peptides. Its slow release formulation allows for fewer doses. 

— Micropump is a slow release oral delivery platform that enables a drug to spend an extended amount of time in the small intestine. The product works well with short-lived drugs and those with a narrow window of absorption. 

— LiquiTime uses microparticles suspended in a liquid as a method to also facilitate slow release. 

— TriggerLock is being developed to help deliver the slow release of opioid drugs in a mechanism that is tamper-resistant. 

FLML is developing a series of drugs around these delivery technologies, but has thus far shared few specifics regarding the actual drugs. Management cites competitive reasons for the limited disclosure, but as a result, investors remain a bit in the dark about potential market sizes it is targeting.

We do know that the company’s first drug to reach the market, Bloxiverz, reveals its unusual approach. Bloxiverz is used for the reversal of the effects of neuromuscular blocking agents after surgery. There are existing drugs on the market, but they have periodically been in short supply, leading to the deferral of some elective surgeries. Notably, these existing drugs never actually received FDA approval. As a result, FLML is taking advantage of an FDA loophole that requires existing drugs to be pulled from the market if a new drug receives FDA approval. 

In the first quarter of 2014, revenue increased roughly 80% to $9.2 million, thanks in large part to sales of Bloxiverz. And management believes that number will be much higher once the FDA removes competitors’ drugs. Analysts expect overall sales to jump nearly 200% this year to $67 million, and another 150% to about $168 million next year. By 2015, analysts are looking for per-share profits in excess of $1, compared with a loss of $1.69 in 2013. 

But it’s the rest of this company’s pipeline that could really put FLML on investors’ radars. The company is preparing an undisclosed drug for launch in coming months. A key setback appeared in late April when the FDA notified the company of quality control issues at a key supplier. But those issues have subsequently been rectified and FLML expects to resubmit its new drug application (NDA) in the “very near future.” 

FLML has two more drugs in the near-term pipeline, and it expects to file NDAs for both of them in the second half of 2014. As noted, management remains tight-lipped about these drugs, but suggests that they represent market opportunities roughly on par with Bloxiverz. Even if one of these drugs is approved in the next 18 months, FLML could be on its way to $300 million in annual revenue within a few years. 

Of course, bringing those drugs to market costs money, especially if FLML chooses to build out a salesforce. For a company that had just $7 million in the bank at the end of 2013, that could be a problem. But a recent capital raise has pumped up the balance sheet, and FLML now has roughly $80 million in net cash. The fact that Bloxiverz is expected to generate positive cash flow means cash burn should be modest, but we won’t know actual cash flow trends until Bloxiverz sales ramp up to a more meaningful level.

It’s quite hard to put a value on this company’s pipeline. But let’s project that FLML will be generating $300 million in annual sales in 2017, at which time EPS could exceed $2.50. Let’s also say that shares deserve to trade for 15 times that EPS forecast. That implies roughly 200% upside to a $37 price target. 

It’s also wise to assume that FLML will hit a few bumps in the road this year as clinical milestones may get pushed out a bit. Accounting for that risk, a $20 year-end price target seems prudent, with even more upside to come in 2015 and beyond. 

Recommended Trade Setup:

–Buy FLML at the market price
— Set stop-loss at $10
— Set initial price target at $20 for a potential 58% gain in six months