We have seen a host of companies such as Moderna Inc and Legend Biotech Corp grow to join the major league of biotech companies. But how do you spot the rookie in the minors ready to make the step up and what are the red flags?
Introduction
Investing in small-cap biotech stocks can be a high-reward yet risky endeavour. The industry is characterised by rapid innovation and scientific breakthroughs, but also by lengthy development processes, regulatory hurdles, and capital-intensive requirements.
This article outlines the key drivers for value creation in the small-cap biotech sector, along with the five most important positives and five red flags to consider when investing. We conclude with some thoughts on how to approach this complex and dynamic market.
Value creation drivers
Novel technologies: The biotech industry thrives on innovation. Small-cap companies with cutting-edge technologies or disruptive therapies can create significant value for investors, especially when they address unmet medical needs or improve upon existing treatments.
Intellectual property (IP) protection: Strong IP protection is crucial for small-cap biotech companies, as it can provide a competitive advantage and safeguard their discoveries from being copied by rivals.
Partnerships and collaborations: Strategic partnerships and collaborations can accelerate drug development, provide access to resources and expertise, and help small-cap biotech companies to reach milestones faster.
Robust clinical data: Positive clinical trial results are essential for regulatory approval and market success. High-quality, reproducible data can validate a company's technology and increase investor confidence.
Market potential: A large and growing target market for a biotech company's products increases the potential for revenue generation and return on investment.
Five positives to look for when Investing in small-cap biotech
Strong management team: A capable management team with a proven track record in the biotech industry is a significant positive. These leaders should have experience in drug development, regulatory affairs, and commercialisation, as well as a history of successfully navigating the challenges of the sector.
Validated technology platform: Look for companies with a solid scientific foundation and a technology platform that has been validated by preclinical studies, published research, or collaborations with reputable institutions.
Favourable Regulatory Environment: A favourable regulatory environment, such as a streamlined approval process, orphan drug designation, or breakthrough therapy designation, can accelerate a drug's path to market and provide a competitive advantage.
Robust Financial Health: Adequate financial resources and a reasonable cash burn rate are crucial for small-cap biotech companies, as drug development is a capital-intensive process with uncertain timelines.
Strong Pipeline: A diverse and robust pipeline with multiple candidates in various stages of development can mitigate the risk of failure for any single drug candidate and increase the likelihood of success.
Five red flags
Overreliance on a single product: Companies that are heavily dependent on a single drug candidate can be highly vulnerable to setbacks, such as negative clinical trial results or regulatory issues.
A lack of diversification in terms of therapeutic areas, technologies, or market segments can increase the risk of failure and limit growth potential.
A high cash burn rate relative to available resources can be a major concern for small-cap biotech companies, as it may necessitate additional fundraising and dilute existing shareholders' value.
An inexperienced management team or one with a history of failures in the biotech industry can increase the risk of poor decision-making and strategic missteps.
Poorly designed clinical trials with inadequate sample sizes, questionable endpoints, or suboptimal patient populations can compromise the validity of the results and jeopardize regulatory approval.
Popular areas of drug R&D
Estimating the precise market size of the popular areas of drug R&D can be challenging due to the rapid pace of innovation and the often-overlapping nature of these categories. However, approximate market sizes can be provided based on recent industry reports and analyses. Keep in mind that these figures may change as new therapies are developed and approved, and as the global demand for treatments evolves.
Immuno-oncology: The global immuno-oncology market was valued at approximately $61 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of around 15% between 2021 and 2028.
Gene and cell therapies: The global gene therapy market was valued at about $4 billion in 2020, with projections of a CAGR of around 16% from 2021 to 2028. The global cell therapy market size was estimated at approximately $7.3 billion in 2020 and is expected to grow at a CAGR of around 14.5% from 2021 to 2028.
Rare diseases: The global orphan drugs market, which primarily focuses on rare diseases, was valued at around $169 billion in 2020 and is projected to grow at a CAGR of about 11% from 2021 to 2028.
Neuroscience: The global neuroscience market, which encompasses various neurological disorders, including neurodegenerative diseases, was valued at approximately $30 billion in 2020. It is expected to grow at a CAGR of around 6% between 2021 and 2028.
Precision medicine: The global precision medicine market, which includes targeted therapies and companion diagnostics, was valued at about $67 billion in 2020 and is projected to grow at a CAGR of approximately 11% from 2021 to 2028.
Case study
Legend Biotech owes its success to its innovative CAR T-cell platform, which demonstrates promise in treating various cancers. With a robust pipeline, including candidates for multiple myeloma, acute myeloid leukaemia, and T-cell lymphoma, Legend Biotech has made significant progress. The lead candidate, cilta-cel, developed in collaboration with Janssen Biotech, shows promising results in relapsed or refractory multiple myeloma trials.
The strategic partnership with Janssen Biotech provides financial resources, expertise, and global market access, accelerating development and commercialisation.
Additionally, Legend Biotech's experienced management team, with expertise in oncology and cell therapy, has effectively navigated the challenges in the biotech sector, contributing to the company's success. Overall, Legend Biotech's innovative technology, strong pipeline, strategic collaboration, and skilled management team have driven its success in the competitive cell therapy landscape.
These figures demonstrate the substantial market potential of these popular areas of drug R&D, which continue to attract significant investment and interest from both the pharmaceutical industry and investors.
Conclusion
Investing in small-cap biotech stocks can offer significant growth opportunities, but it also comes with inherent risks. Due diligence is essential when assessing potential investments in this complex and dynamic market. Real-world examples of successful small-cap biotech companies, such as Moderna, Alnylam Pharmaceuticals (NASDAQ:ALNY), Oxford Biomedica, and Adaptimmune Therapeutics (NASDAQ:ADAP), demonstrate the potential for value creation through novel technologies, strong management teams, and strategic partnerships.
Annual global spending on drug development R&D highlights the importance of innovation in the pharmaceutical and biotechnology industries. As research continues to advance, areas such as immuno-oncology, gene and cell therapies, rare diseases, neuroscience, and precision medicine are likely to remain popular and attract significant investment. Staying informed about these trends and understanding the key drivers of value creation can help investors navigate the small-cap biotech landscape and identify promising opportunities.
This week’s popular biotech stocks on Proactive
- ImmuPharma PLC (AIM:IMM, OTC:IMMPF)
- Tiziana Life Sciences Ltd (NASDAQ:TLSA)
- MGC Pharmaceuticals Ltd (LSE:MXC, OTC:MGCLF, ASX:MXC)
- Willow Biosciences Inc (TSX:WLLW, OTCQB:CANSF)
- Voyageur Pharmaceuticals Ltd (TSX-V:VM, OTC:VYYRF)
- Numinus Wellness Inc
- Poolbeg Pharma PLC (AIM:POLB, OTCQB:POLBF)
- Race Oncology Inc
- Pharmaxis Ltd (ASX:PXS, OTC:PMXSF)
- Reece Pharmaceuticals Inc