The world of biotech investing can be tricky. And that’s particularly true for small-cap stocks in the biotech sector. These companies often have terrific science, but no profits and little if any revenues. And yet there are outstanding opportunities in this sector for investors who know what to look for and have a long-term outlook.
Perhaps the best strategy for healthcare investors looking to add winning biotechs to their portfolio is to invest in a handful of small-cap biotechs. By doing so you diversify your risk. One winning small-cap biotech can more than make up for two or three losses. And investors can stack the odds in their favor by investing in small-cap companies with multiple drugs in their pipelines. Here are two small-cap biotechs that fit the profile MeiraGTx (NASDAQ:MGTX) and BridgeBio Pharma (NASDAQ:BBIO).
1. A next-generation pioneer
MeiraGTX is a small cap (valued at $678 million) with an ambitious program and six molecules in its pipeline. The company is focused on three distinct forms of genetic disease: ocular, neurodegenerative, and salivary gland.
The stock took off earlier this year when Johnson & Johnson (NYSE:JNJ) became a minority shareholder and signed a $440 million deal with the tiny biotech. Johnson & Johnson acquired rights in three MeiraGTx drugs that might cure blindness caused by a genetic defect. Two of the drugs are focused on Achromatopsia caused by mutation in the CNGB3 and CNGA3 genes, and the other eye drug is a cure for people suffering from X-Linked Retinitis Pigmentosa. Under the contract, Johnson & Johnson is funding all clinical development of the drugs. MeiraGTx is also developing an eye drug (not part of the JNJ deal) that targets blindness caused by RPE65-deficiency.
Perhaps its most exciting program is in neurodegenerative disease. MeiraGTx has plans to find cures for Parkinson’s, ALS, and Alzheimer’s. Its Parkinson’s drug has finished a phase 2 trial with positive results. Unlike other drugs that only treat symptoms of the disease, this drug actually created new neural networks in the brain. CEO Zandy Forbes said, “We believe our novel gene therapy product candidate could potentially transform the treatment of Parkinson’s disease patients.”
The science of gene therapy is so powerful, big pharma has been acquiring tiny biotechs for billions of dollars. In April 2018, Novartis (NYSE:NVS) acquired AveXis for $8.7 billion to get its spinal muscular atrophy drug, Zolgensma. And in January, Roche (OTC:RHHBY) acquired Spark Therapeutics for $4.8 billion for its cure for blindness caused by RPE65-deficiency, Luxturna.
Johnson & Johnson’s deal with MeriaGTx not only validated its platform, but it caused investors to speculate the company might be acquired outright. MeiraGTx has a larger and more diverse pipeline than AveXis and Spark. Since the deal was announced, shares of the small company have tripled, from under $10 a share in January to $30 a share in July. MeiraGTx used its share price to raise more funds for its drug development by issuing a secondary offering. This dilution brought the share price back down to $18 a share. And yet this small-cap biotech has $200 million in cash, almost no debt, a major drug partner to finance half of its clinical trials, and a headstart on its competitors in finding a cure for Parkinson’s. The future looks bright.
2. A biotech holding company
BridgeBio Pharma is a…
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