The pharma/biotech sector has been struggling so far in 2018. The sector is plagued by several factors, which include drug pricing issues, declining sales of legacy products and unfavorable clinical outcomes or regulatory updates. Moreover, competition from branded as generic drugs are also putting pressure on revenues. However, small biotechs developing innovative medicines provide opportunities to make significant gains on investment.
In the past month, the Biomed/Genetics industry has increased 4.4% against the Large Cap Pharma industry’s decline of 0.7%. The upside momentum in the Biomed/Genetics industry is expected to continue as approximately 30 new drugs are awaiting approval, with the majority belonging to pharma companies.
Why are Small Biotechs in Focus?
Small biotech stocks are good bets with lower market cap as well as share price. These stocks represent significant upside opportunities with lower capital at risk. Moreover, large pharma companies are reeling under drug pricing pressure. But these biotech companies generally develop innovative or rare disease treatments and address new markets. This enables them to charge higher prices. Moreover, the orphan drug exclusivity also keeps competition at bay.
A favorable clinical study data or regulatory decision on the pipeline candidates of these companies can give a significant boost to shares. However, there’s an inherent risk in every investment, which, in this case, is a negative clinical outcome or regulatory decision.
Meanwhile, in order to battle rising competition and pricing pressure, large-cap companies are also trying to bring innovative therapies in the market. This can happen through in-house pipeline addition or through acquisition of smaller biotech companies. We have already seen some big ticket mergers & acquisitions so far in 2018 with Takeda buying Shire plc for $62 billion. The acqusition is expected to be completed in 2019. Sanofi (SNY - Free Report) and Celgene have also acquired smaller biotech companies to boost their pipeline. The bigger pharma companies are also collaborating with smaller biotechs to use the latter’s platform. This creates a steady revenue stream for the smaller biotechs, thus boosting their share price.
The reduction in tax rates following the major tax overhaul in December and a one-time low tax window for cash repatriation has boosted the cash position of large-cap companies. This higher in-hand cash has spurred M&A activity in the sector, even at hefty premiums. Smaller companies are likely to benefit more from increasing M&A activity in the sector.
The FDA has also accelerated its approval process. It approved 22 new drugs in 2016, which more than doubled in 2017 to 46. Moreover, so far this year, 15 new drugs have already received approval. Many of these new drugs were developed by small and medium-sized biotechs.
Small investors, who are on the lookout for lower priced stocks, can focus on the companies listed below for prospective high returns.
We have chosen five small biotechs based on rising estimates, strong growth prospects and favorable Zacks Rank. Each of these stocks is currently trading for less than $10 per share, holds a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a Growth Score of A or B. We have taken the help of the Zacks Stock Screener to select the stocks.
Bellerophon Therapeutics, Inc. is a biotech company focused on developing products for the treatment of cardiopulmonary and cardiac diseases. The company does not have any marketed drug. It has two key pipeline candidates in several mid to late-stage studies.
The company currently sports a Zacks Rank #1 and has Growth Score of B. Its earnings are projected to grow 74.4% in 2018. Moreover, estimate revisions show that loss estimates narrowed from 50 cents to 23 cents for 2018 in the last 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
CytRx Corporation (CYTR - Free Report) is focused on developing oncology treatments. The company’s lead pipeline candidate, aldoxorubicin, is being evaluated in several cancer types including advanced soft tissue sarcomas. The candidate enjoys orphan drug status in the United States as well as Europe.
The company currently carries a Zacks Rank #2 and has a Growth Score of B. Its earnings are projected to grow 51.3% in 2018. Moreover, loss estimates narrowed from 96 cents to 74 cents for 2018 in the last 30 days.
Kamada Ltd. (KMDA - Free Report) , an Israel-based biotech company, has two marketed products in its portfolio and a late-stage pipeline candidate. The company’s emphysema (shortness of breath) drug, Glassia, is the major revenue generator of the drug. Kamada has collaboration with Shire for commercialization of the drug in the United States.
The company currently has a Zacks Rank #2 and a Growth Score of B. Earnings are projected to grow 42.1% on the back of a revenue growth of almost 13% in 2018. Moreover, estimate revisions show that earnings estimates have increased from 23 cents to 27 cents for 2018 in the last 30 days.
Menlo Therapeutics Inc. (MNLO - Free Report) is a clinical-stage biopharmaceutical company focused on the development of its pipeline candidate, serlopitant, for the treatment of chronic itch and chronic refractory cough among others. The company went public in January 2018.
The company currently carries a Zacks Rank #2 and has a Growth Score of B. The bottom line is projected to grow 43.8% in 2018. Loss estimates have remained stable at $3.20 for 2018 in the last 60 days.
Sunesis Pharmaceuticals, Inc. (SNSS - Free Report) is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel small molecule therapeutics for oncology and other serious diseases. It has a broad product candidate portfolio through internal discovery and in-licensing of novel cancer therapeutics.
The company currently holds a Zacks Rank #2 and has a Growth Score of B. Earnings are projected to grow 36.5% on the back of strong revenue growth of 86.9% in 2018. Moreover, estimate revisions show that loss estimates narrowed from $1.04 to 92 cents for 2018 in the last 60 days.
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