For many, small-cap biotechnology companies are a risky investment proposition. It is true that the success of these investments generally hinge on an unproven medication or on a company’s ability to execute in the clinic and on the commercial playing field.
Nonetheless, there are also cases where investing in small-cap biotechnology companies has led to tremendous profits as small caps become large caps over the long term.
While not all of them will make it to this stage, those who do will yield incredible returns for their investors. Below is a list of several companies that I believe have the potential to become this type of story.
Cara Therapeutics (CARA – Market Cap ~$1 Billion)
Cara Therapeutics is a stock that is on the verge of breaking into the big time. With a market cap at about $1 billion, the stock is trading well below the $2 billion small-cap threshold, but like all on this list, I believe it has large-cap potential.
The big story surrounding the company is its lead drug candidate, Korsuva. The treatment just made it through one Phase 3 study in which it performed relatively well and is nearing the data readout for a second Phase 3 study.
Should all go well, Cara Therapeutics plans on submitting the drug for regulatory approval “as quickly as possible.” Should the treatment be approved for its target indication, liver-disease-related itching, it could quickly become a blockbuster.
Some experts believe that the drug could quickly ramp up to generate more than half a billion dollars in revenue per year. These estimates are likely modest, considering that there are no FDA-approved options on the market at the moment, leaving Cara Therapeutics with a relatively competition-free playing field.
It’s also worth mentioning that the company’s agreement with Fresenius to bring Korsuva outside of the United States, Japan, and South Korea could yield incredible revenue. Also, with Fresenius Medical Care being the world’s largest dialysis provider, the company will market the drug within its network of dialysis clinics in the US, offering an even more explosive opportunity.
With all of this in mind, investors should be watching closely for the data readout of the second Phase 3 trial. If all goes well, it could lead to incredibly bullish activity in the stock.
Spherix (SPEX – Market Cap ~$5 Million)
With a market cap of around $5 million, Spherix is pretty small, even when talking about small caps. In fact, many would go as far as to call the company a nano-cap play. Nonetheless the large cap potential here is something that shouldn’t be ignored.
For quite some time, Spherix has been called an intellectual property company. Regardless of what it is called, its operations looked more like what you’d see from a hedge fund. Focused on making investments in accretive assets, Spherix has driven incredible value growth.
In fact, it is the first company at its stage that I’ve seen do two things:
- Trade At Half Book Value – The book value of Spherix clocks in at about $12 million. With a market cap of around $5 million, the company is trading at a rate of less than half of its book value. That’s unheard of in the biotechnology space, especially when looking at companies of the scale of Spherix.
- Propose A Dividend – In mid-August, 2019, Spherix issued a shareholder letter, proposing a dividend with a value of around $500,000, or about one-tenth of its market cap. The company also suggested that more dividend proposals would be ahead. When was the last time you saw a nano-cap biotechnology company do that?
Spherix is able to make big moves like this because of the success of its investments. One of the most successful of these is an investment that was made about two years ago in Hoth Therapeutics. At the time, the company invested about $700,000. Today, Hoth Therapeutics is a NASDAQ-listed company, trading with a market cap of $50 million, about $10 million of which is owned by Spherix.
For me, the most important part of the value proposition is what comes ahead. In the same release announcing the proposed dividend, the company urged investors to approve the acquisition of CBM BioPharma. Should this acquisition take place, the company will become a full-fledged oncology therapeutic development company with promising assets ready to move to the clinic. The potential here could be incredible. Moreover, with financial strength, the company has a long runway to get through several positive catalysts – yet another thing rarely seen in nan-cap biotech.
All in all, with a strong focus on driving shareholder value in the right ways and a valuable transition likely ahead, Spherix is a stock small-cap stock with the potential to grow to be a large-cap in the long run.
Inspire Medical Systems (INSP – Market Cap ~$1.5 Billion)
With a market cap of about $1.5 billion, Inspire Medical Systems is only about half a billion dollars away from being a mid-cap company, and that growth could happen pretty quickly ahead.
Inspire Medical is a company that’s working to tackle a growing problem in an innovative way. The company is working to combat sleep apnea, but without the use of continuous positive airway pressure, or CPAP, machines.
Considering reports of discomfort and the loud operation of these machines, patients are looking for better options, and Inspire Medical Systems is offering just what they’re asking for. The company offers a minimally invasive device that stimulates a nerve in order to keep the patient’s tongue from blocking their airway while sleeping. This avoids the need for loud and uncomfortable CPAP machines.
As a result, many experts expect that Inspire Medical’s option could quickly become a driving force in the industry. As of now, about 5,000 patients have been treated with the device, but there’s plenty of market opportunity ahead.
It is estimated that 17 million people in the United States have moderate to severe obstructive sleep apnea. Of these, about 2 million are prescribed CPAPs on an annual basis.
Because of the discomfort involved in these machines, it is estimated that one-third of patients do not use them as recommended. This creates a large addressable market in need of new options.
That’s likely why the company’s sales grew 61% year over year and are likely to do more of the same in the year ahead. In fact, sales ahead will likely be bolstered by a positive coverage decision by UnitedHealth, the nation’s largest insurer that will now cover Inspire’s device.
All in all, with a medical device that has the potential to generate blockbuster sales, Inspire Medical is a stock that should be watched closely.
Catalyst Pharmaceuticals (CPRX – Market Cap ~$600 Million)
With a market cap of about $600 million, Catalyst Pharmaceuticals has quite a way to go before it moves to mid-cap territory. However, there’s a strong argument brewing that this could take place relatively quickly.
Catalyst Pharmaceuticals’ claim to fame is Firdapse, it’s adult-use Lambert-Eaton myasthenic syndrome (LEMS) drug. Unfortunately, last May, disaster hit the stock when the FDA approved a rival medicine known as Ruzurgi for use in pediatric LEMS patients.
Nonetheless, this approval will likely be overturned. That’s because Firdapse is an Orphan Drug, one that should enjoy a seven-year exclusivity period. While Ruzurgi is not indicated for adults, it could be prescribed off-label, a workaround used by the FDA to approve Ruzurgi that will likely lead to a reversal.
Catalyst Pharmaceuticals shares are starting to bounce back after the company filed a Federal lawsuit against the FDA. The lawsuit alleges that the FDA violated the statutory rights to Orphan Drug exclusivity of Firdapse. The truth is that Catalyst has a very strong case here.
The fact of the matter is that the approval of Ruzurgi undermines the reason to have Orphan Drug programs in the first place. The idea is to spur development of treatments for rare diseases. Finding workarounds to exclusivity periods for these expensive-to-develop treatments would hinder medical innovation.
It’s also worth mentioning that the company is currently trading with a valuation of less than 2 times projected 2024 sales. That speaks volumes to the company’s clear undervaluation. This, in combination with a nearly sure win and coming exclusivity for Firdapse, makes this a stock that’s hard to ignore.
Intercept Pharmaceuticals (ICPT – Market Cap ~$2 Billion)
Finally, we have Intercept Pharmaceuticals. With a market cap of just under $2 billion, the company is sitting at the threshold between small-cap and mid-cap. Nonetheless, it’s one that’s well worth watching.
For Intercept Pharmaceuticals, the story to watch is that of Ocaliva. The treatment is currently approved as an option for primary biliary cholangitis, also known as PBC. Sales of the treatment are growing fast, up 53% year over year in the second quarter; the drug raked in $65.9 million in sales during that time.
With the already approved indication, Ocaliva is very valuable. However, this value is pennies compared to the future potential of the drug. At the moment, the company is assessing the drug as a potential option in NASH, a liver disease that affects between 2% and 5% of adults in the United States.
At the moment, there are no FDA approved options for the treatment of NASH. However, should one hit the market, experts suggest that it could come with $35 billion in annual sales potential, making this a blockbuster opportunity.
In early 2019, Intercept released data showing that Ocaliva reached one of two co-primary endpoints in the Regenerate trial. The data showed a reduction in liver fibrosis in NASH patients. While positive results were seen in NASH resolution, the second co-primary endpoint, these results were not statistically significant.
Unfortunately, a side effect of the drug was itching, an issue that, as you know from the Cara Therapeutics portion of this article, is a big problem for liver disease patients. So, many are worried that this may hinder sales, should the drug be approved.
Nonetheless, concerns that this may hinder approval are unwarranted. The truth of the matter is that the FDA has already cleared the drug’s safety profile when it approved Ocaliva for PBC.
It’s also worth mentioning that with no approved options for NASH and a Phase 3 study showing efficacy with minimal side effects, there’s a strong chance of approval.
Considering the potential of Ocaliva for both, it’s approved indication, and the larger value in the NASH indication (should it be approved), Intercept Pharmaceuticals is a stock that’s hard to ignore.
In 1992, Gilead Sciences traded at around $0.70 per share as a penny stock. Today, the stock is a monster, with a market cap of more than $80 billion. Those that invested just $5,000 when Gilead Sciences traded at $0.70 per share, would be sitting on nearly a half a million dollars in shares today.
While there can be no assurance that any stock is going to grow, I believe that the stocks above are worth watching, as any of them could become a penny stock to large-cap stock story in the long run.
CNA Finance, parent company to iWatch Markets, has a financial relationship with Spherix. Find out more here.