Back to top

Image: Bigstock

5 Small Drug Stocks to Buy Amid Lingering COVID-Led Uncertainty

Read MoreHide Full Article

Sales of some drugs/vaccines/products were hurt by the coronavirus pandemic, mostly in the first half of 2020 with some recovery trends observed in the second of the year. Drugmakers are generally optimistic of a continued recovery in macroeconomic and healthcare activity throughout 2021 as vaccinations continue.  However, some residual impact of the pandemic is expected, mostly in the first half of the year due to resurgence of infection rates and emergence of more deadly variants of the virus.

Nonetheless, successful innovation resulting in new drug/product approvals, important advances in clinical studies, and strategic collaborations with strong partners have kept companies like Radius Health (RDUS - Free Report) , USANA Health Sciences (USNA - Free Report) , Organogenesis Holdings (ORGO - Free Report) , Turning Point Therapeutics (TPTX - Free Report) and Oncternal Therapeutics (ONCT - Free Report)  afloat.

Industry Description

The Zacks Medical-Drugs industry comprises small drug companies, including some foreign ones, which make medicines for both human and veterinary use. We have a separate industry outlook discussion for some of the biggest drugmakers of the world. (Read more: 3 Large Drugmakers Set to Rule the Sector in 2021)

Most of the small drugmakers have a limited portfolio of marketed drugs or in some cases no commercial-stage drugs at all. Some of these drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the main source of revenues. These companies therefore need ample free cash flow to fund their research and development activity.

Factors Shaping the Future of the Medical-Drugs Industry

Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive stock price of the industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for these stocks.

Strong Collaboration Partners: These companies regularly seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal. Though M&A activity slowed down in 2020, collaborations with larger counterparts remained strong. M&A and collaborations activities are expected to increase in 2021 as healthcare activity gradually becomes more normal.

Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires them to adopt innovative business models, invest in new technologies and increase investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the new priorities for drug companies, going forward.

Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share price in the future.

Zacks Industry Rank Indicates Uncertainty

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #197, which places it in the bottom 22% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2021 have moved down 11.3% over the past year.

Despite the bleak near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500 and Sector

The Zacks Medical-Drugs industry is a huge 190-stock group within the broader Medical sector. The industry has underperformed the S&P 500 and the Zacks Medical sector in the past year.

Stocks in this industry have collectively risen 9.3% in the past year, while the Zacks S&P 500 composite has risen 20% and the Zacks Medical sector has risen 9.4%.



Industry’s Current Valuation

On the basis of trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 2.60 compared with the S&P 500’s 5.64 and the Zacks Medical sector's 3.43.

Over the last five years, the industry has traded as high as 4.34X, as low as 1.72X, and at the median of 2.51X, as the chart below shows. 




5 Small Drug Stocks to Keep an Eye On

Radius Health: The company makes endocrine therapeutics in the areas of osteoporosis and oncology. Its loss estimates for 2021 have narrowed from $1.65 per share to $1.05 per share over the past 60 days. This Zacks Rank #2 (Buy) stock has risen 4.8% in the past year

Sales of Radius Health’s lead drug Tymlos, indicated for treating postmenopausal women with high-risk osteoporosis for fracture, were strong in 2020. The company is also working to expand the drug’s label, which will boost its prospects.  The wearABLe study, evaluating the effects of Tymlos delivered via a novel transdermal system on bone mineral density has completed final recruitment. Enrollment in the phase III study, ATOM, which is assessing the efficacy and safety of Tymlos in men with osteoporosis, is 90% complete with top-line data expected in the second half of 2021. The company’s license agreement for elacestrant with Menarini Group is a positive as it provides it with an influx of cash. 

Price and Consensus: RDUS


USANA Health Sciences: The company develops and manufactures high-quality nutritional, personal care and weight-management products. In 2020, USANA delivered strong sales (up 7% year over year) despite continued challenges from the pandemic helped by an acceleration of its digital initiatives. Earlier this week, it reported better-than-expected fourth quarter results as demand for its high-quality nutritional products remained strong. The company is quite optimistic of delivering continued strong growth in 2021 and gave a bullish financial outlook for the year.

The company’s stock price has risen 24.1% in the past year. Its consensus estimate for 2021 has improved from $5.59 per share to $5.66 per share over the past 60 days. It has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: USNA


Organogenesis Holdings: This Zacks Rank #2 company is a leading regenerative medicine company focused on the development and commercialization of solutions for the Advanced Wound Care and Surgical & Sports Medicine markets. The stock has risen 180.1% in the past year. The consensus estimate for 2021 has narrowed from loss of 4 cents per share to 1 cent per share over the past 60 days.

The company’s preliminary 2020 sales numbers were above management’s guidance. Sales in 2020 are expected to rise approximately 29% despite the pandemic. The company’s strong sales and profits in 2020 were driven by strong demand for its products particularly in the office channel. The recent strategic acquisition of CPN Biosciences will drive further growth in the office channel.


Price and Consensus: ORGO


Turning Point Therapeutics: This biotech, which is developing novel small molecule targeted oncology therapies, has risen 116.5% in the past year. The consensus estimate for 2021 has narrowed from a loss of $4.39 per share to $4.08 per share over the past 60 days. The company has a Zacks Rank #2.

The company’s lead drug candidate, repotrectinib has demonstrated antitumor activity and durable responses in a mid-stage registrational study (TRIDENT-1) in patients with ROS1-positive TKI-naïve non-small cell lung cancer (NSCLC). The candidate has the potential to be the best-in-class treatment in this patient population. The company also has an interesting pipeline of four drug candidates.


Price and Consensus: TPTX



Oncternal Therapeutics: This cancer biotech has a Zacks Rank of 2.The loss estimates for 2021 have improved from 75 cents to 48 cents per share over the past 60 days. The stock has risen 79.8% in the past year.

The company's clinical pipeline includes cirmtuzumab, TK-216 and a CAR-T therapy that target ROR1. Interim data from a phase I study of TK216 in patients with relapsed or refractory Ewing sarcoma was presented in September last year. The data showed that two of the 15 evaluable patients had achieved complete responses. 


Price and Consensus: ONCT

 Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 best buy-and-hold tickers for the entirety of 2021?

Last year's 2020 Zacks Top 10 Stocks portfolio returned gains as high as +386.8%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.

Access Zacks Top 10 Stocks for 2021 today >>