After many years of neglect, the pipeline for new antibiotic drugs is finally beginning to ramp up again.

The catalyst: the rise of “superbugs,” which are bacteria that have developed resistance to some or all of the currently available antibiotics. Infections with such bacteria can be extremely difficult or even impossible to treat, and they’re often far more severe than those caused by non-resistant organisms.

In the latest government budget proposal, which allocates $1.2 billion to combatting antibiotic resistance, the Obama administration estimated that superbugs now cause two million illnesses and 23,000 deaths annually in the United States. The failure to address antibiotic resistance (by creating new antibiotics, among other measures) could lead to 300 million premature deaths worldwide and shear up to $100 trillion off of the global economy over the next 35 years, notes economist Jim O’Neill.

#-ad_banner-#Despite the gravity of the issue, large pharmaceutical companies devote virtually no resources to antibiotic development and haven’t for years. “Big Pharma” largely quit the antibiotics business back in the 1990s, deterred mainly by high R&D costs and low perceived profit potential.

To help stimulate new advances, the federal government passed the Generating Antibiotic Incentives Now (GAIN) Act. The 2012 legislation permits fast-track approval and five additional years of patent protection for new antibiotics. Currently, drug makers are pursuing approval for about five dozen antibiotics under the Act, according to the International Business Times.

A recent “graduate” of the program: Avycaz, a two-drug combination approved by the FDA in February for intra-abdominal and urinary-tract infections caused by multi-drug resistant bacteria.

Ireland-based pharmaceutical giant Actavis Plc. (NYSE: ACT), which acquired the drug last July in a buyout of Forest Laboratories, Inc., estimates peak annual sales of $250-to-$500 million. Avycaz is scheduled for U.S. launch this quarter.

In a buyout of Durata Therapeutics, Inc. last November, Actavis acquired Dalvance, an intravenous antibiotic for adults with acute bacterial skin infections. The drug, now in phase III trials, has thus far proven to be effective against one of the most feared superbugs — Methicillin-resistant Staphylococcus aureus, or MRSA.

If eventually approved, Dalvance could emerge as a rival to a similar drug called Cubicin, which was approved by the FDA more than a decade ago, which can also combat MRSA. Cubicin generates revenue of about $1 billion annually. Merck & Co., Inc. (NYSE: MRK) acquired the drug in January when it took over Cubist Pharmaceuticals, Inc.

U.K.-based GlaxoSmithKline Plc. (NYSE: GSK) is also performing early clinical studies of three antibiotics. Two of these work in a similar fashion to existing compounds, but with modifications that may prove useful in combatting certain resistant bacteria. The third has a totally novel mechanism of action that, if found effective, may result in an especially potent superbug killer.

With relatively few large players to occupy the antibiotics market, numerous smaller ones are emerging. Of those that are publicly traded, two of the most promising are Tetraphase Pharmaceuticals, Inc. (Nasdaq: TTPH) and Cempra, Inc. (Nasdaq: CEMP), a pair of clinical-stage firms with market values of less than $2 billion. (Actavis, Merck and GlaxoSmithKline are all valued well in excess of $100 billion.)

As you’d expect at this stage, both firms are operating in the red as they channel the bulk of resources into hefty new-drug R&D budgets. During the past 12 months, Tetraphase spent nearly $70 million on clinical trials for its lead product eravacycline, a novel antibiotic being developed to treat intra-abdominal and urinary-tract infections.

Recent phase II and III clinical trials compared the drug to Invanz, a Merck medication that’s currently considered the standard of care for intra-abdominal and urinary-tract infections. The trial findings suggest that eravacycline could become a first-line treatment for such infections based on equal efficacy, a favorable side-effect profile, a more convenient dosing schedule and robust activity against a wide spectrum of multi-drug-resistant bacteria.

Tetraphase expects to submit eravacycline for FDA approval by the end of the year. If approved, the drug will also be competing against Actavis’s Avycaz.

Much of Cempra’s roughly $70 million R&D budget is allocated to the development of the antibiotic solithromycin as an oral or intravenous therapy for bacterial pneumonia. Recent phase II and III trial data indicate that the drug is as effective for this purpose as the standard first-line treatment, moxifloxacin, but with a significantly better side effect profile and virtually no bacterial resistance.

Pneumonia-causing bacteria now commonly display great resistance to moxifloxacin, particularly in North America and Asia. In cases of resistant pneumonia, the drug’s efficacy is substantially reduced.

Cempra’s management has not yet announced plans to submit solithromycin for FDA approval, though the fact that the drug is in late-stage trials suggests a submission could come soon. The firm could seek simultaneous approval for the treatment of bacterial pneumonia and gonorrhea, since phase III data have shown solithromycin effective for the latter disease as well.

Risks To Consider: Although the superbug problem gives the FDA extra motivation to approve new antibiotics, investors should keep in mind the lottery-like nature of the approval process. Drug development efforts come to naught far more often than not, so very few up-and-coming antibiotics are likely to make the final cut.

Action To Take –> As it hums back to life to meet a serious public health threat, the antibiotic pipeline should offer an increasing number of investment opportunities. More conservative investors may want to start their research with the large drug firms mentioned above. While antibiotics are a relatively small portion of these companies’ portfolios, shareholders should get at least some meaningful exposure without taking undue risk.

For the highly risk-tolerant, publicly traded development-stage firms like Tetraphase and Cempra offer a unique chance at impressive capital appreciation since they’re pure plays. Both stocks have already soared around sixfold. Further gains are possible if their drugs are approved or they’re bought out. But any serious missteps could result in painful losses.

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