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Small Drugmakers Outperforming the Bigshots: 7 Stocks to Buy

Kinjel Shah

While many investors eye large companies for safe investing, small companies are in fact a great place to find big investment returns. At present, this holds true for the specialty-pharma sector wherein smaller drugmakers are performing better than their larger counterparts.

Most of these drugmakers either have a small marketed drugs portfolio or no commercial-stage drugs at all. Some of these clinical stage drugmakers are dependent on just one pipeline candidate. Thus, the success or failure of the pipeline candidate/s in clinical studies can significantly impact the stock’s price.

A partnership deal with a popular drug maker is a good sign about the potential of the small pharma companies, especially when there's an equity investment included in the deal. For most of these companies, upfront or milestone payments from collaboration partners — in most cases their larger counterparts — are the only source of revenues. These companies therefore need ample free cash flow to fund their huge R&D costs. Smaller companies are also likely to benefit more from increasing M&A activity in the medical sector this year.

For these companies, succeeding in a shifting global market and evolv­ing healthcare landscape requires them to adopt innovative business models, invest in new technologies, increase investments in personalized medicines and seek external partners and collabora­tors for complementary strengths.

These smaller innovative companies, in general, are having a relatively better year than their larger counterparts, which are in trouble due to generic competition for their key drugs, pricing issues and rising competition. Successful innovation resulting in new drug approvals, important advances in clinical studies of their pipeline candidates, strategic collaborations with strong partners and frequent M&A activity have kept the companies afloat in an aggressive competitive market.

The Zacks Medical-Drugs, which is a huge 177-stock group of drug companies that make medicines for human use mainly from small molecules and artificial materials, within the broader Zacks Medical Sector, has outperformed its own sector on a year-to-date basis. In fact, it has also outperformed the Zacks Large Cap Pharma Industry, which is a 14-stock group.

Year-to-Date Price Performance

 

 

 

While the stocks in the Medical-Drugs industry have collectively risen 11.8% year to date, the Zacks Medical sector has risen 8.9% while the Zacks Large Cap Pharma industry has gone up 4.9%.

Favorable Zacks Rank

The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #71, which places it in the top 29% of more than 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.

Our Choices

As sales of larger pharma companies are decelerating due to slowing product growth and increasing price pressure, investment in small- and mid-cap drugmakers makes more sense. Here we pick seven small specialty drugmakers, which carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). All these companies have witnessed positive earnings estimate revisions and their stock price has risen this year so far.

Alpine Immune Sciences, Inc. ALPN

Alpine Immune Sciences makes protein-based immunotherapies for cancer, inflammatory disorders, and other diseases. This Seattle, WA based company, which carries a Zacks Rank #2, has seen its stock rise 84% this year so far. The company’s 2019 loss estimates have narrowed by 4.6% while that for 2020 narrowed almost 32% over the past 60 days.

AcelRx Pharmaceuticals, Inc. ACRX

This Redwood City, CA based drugmaker makes medicines to treat acute pain. This #2 Ranked company has seen its stock rise 49.8% so far this year. Loss estimates narrowed have from 96 cents to 88 cents for 2019 and from 78 cents to 68 cents for 2020 over the past 60 days.

Actinium Pharmaceuticals, Inc. ATNM

The New York based cancer therapies maker has a Zacks Rank of 2. The company’s loss estimates have narrowed from 26 cents to 22 cents for 2019 and from 18 cents to 17 cents for 2020 over the past 60 days. The stock has risen 55% year to date.

KalVista Pharmaceuticals, Inc. KALV

Shares of this Cambridge, MA based drugmaker for small molecule protease inhibitors for treating diseases like hereditary angioedema (HAE) and diabetic macular edema (DME) have risen 45.6% this year so far. The Zacks Rank #1 company has seen its loss estimates narrow almost 20% for 2019 and 6.3% for 2020 over the past 60 days.

Molecular Templates, Inc. MTEM

Shares of this Zacks #1 Ranked Austin, TX based small cancer biotech have risen 53.5% so far this year. Its loss estimates narrowed by 14% for 2019 over the past 60 days.

Tricida, Inc. TCDA

This San Francisco, CA based company is making a medicine to treat metabolic acidosis in patients with chronic kidney disease (CKD).This #2 Ranked company has seen its stock rise 53.7% year to date. Loss estimates have narrowed from $3.45 to $3.42 for 2019 over the past 60 days.

Otonomy, Inc. OTIC

This Zacks #2 Ranked San Diego, CA based company develops therapeutics for neurotology. The company has seen its stock rise 49.7% this year so far. Its 2019 loss estimates have narrowed from $1.83 cents to $1.73 cents per share while that for 2020 narrowed from $1.60 cents to $1.53 cents over the past 60 days.

Year-to-Date Price Performance of 7 Stocks

 

Conclusion

The smaller companies have their share of risk in the form of unstable cash flow. Also, a negative clinical outcome or regulatory obstacles can affect these smaller companies and significantly hurt their share price. Nonetheless, considering their low price and bright growth prospects, these appear to be great investment opportunities currently.

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Actinium Pharmaceuticals, Inc. (ATNM) : Free Stock Analysis Report
 
Otonomy, Inc. (OTIC) : Free Stock Analysis Report
 
KalVista Pharmaceuticals, Inc. (KALV) : Free Stock Analysis Report
 
AcelRx Pharmaceuticals, Inc. (ACRX) : Free Stock Analysis Report
 
Molecular Templates Inc. (MTEM) : Free Stock Analysis Report
 
Nivalis Therapeutics, Inc. (ALPN) : Free Stock Analysis Report
 
Tricida, Inc. (TCDA) : Free Stock Analysis Report
 
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