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 have no profits, and often have no 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 who have multiple drugs in their pipeline. Here are two small-cap biotechs who fit that profile: MeiraGTx (MGTX 3.40%) and BridgeBio Pharma (BBIO 0.44%).
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.
Image Source: Getty Images
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. For instance, in April of last year, Novartis (NVS -0.02%) spent $8.7 billion acquiring AveXis and its spinal muscular atrophy drug, Zolgensma. And in January, Roche (RHHBY -0.80%) paid $4.8 billion to acquire Spark Therapeutics and its cure for blindness caused by RPE65-deficiency, Luxturna. So the market noticed when Johnson & Johnson made a major investment in MeiraGTx. The $440 million deal not only validated MeiraGTx's platform, it caused many to speculate that the company might be acquired outright. Indeed, tiny MeiraGTx has a larger and more diverse pipeline than both AveXis and Spark.
Since the deal with Johnson & Johnson was announced, shares of the small company have tripled, from under $10 a share in January to $30 a share in July. MeiraGTx decided to use its share price to raise more funds for its drug development, and so it issued 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 $3 billion dollar biotech that has a dizzying array of subsidiaries and drug development programs. Whenever BridgeBio finds a new drug candidate, it creates a new subsidiary specifically for that molecule. And while its a small cap, the company has 8 drugs in its pipeline and another 8 drugs in preclinical development. This means the company has 16 subsidiaries. Each subsidiary is responsible for its own drug platform. BridgeBio owns 66% of one public biotech, Eidos Therapeutics (EIDX), and owns its 15 other subsidiaries outright.
BridgeBio and its subsidiaries are all focused on gene therapies and oncology drugs. One of its subsidiaries, Origin Biosciences, is running a phase 3 trial to test a drug for MoCD, an ultra-rare metabolic disorder that affects 100 people. Another subsidiary, PellePharm, has a phase 3 molecule for people who have Gorlin syndrome, a rare condition that increases the risk of developing cancer. And BridgeBio's publicly traded subsidiary, Eidos, is running a phase 3 trial for its cure for TTR Amyloidosis, a disease that affects more than 400,000 people.
In its S-1, BridgeBio identifies five programs that the company believes are its key value drivers, and it has prioritized them. The first one listed is BBP-265, which is the drug being developed by Eidos for use as a TTR stabilizer.
Eidos actually came to the market before BridgeBio, and it is up 272% from its IPO last year. BridgeBio owns two-thirds of its subsidiary, spending $75 million to acquire its shares. Eidos now has a market cap of $1.7 billion dollars, giving BridgeBio a cool 1,500% return on its investment.
Three of BridgeBio's key programs are not in clinical trials yet, so it will be a while before the market will be able to value them. BridgeBio does have a major program in cancer. Its subsidiary, QED Therapeutics, is enrolling patients for a phase 3 study for its drug, Infigratinib. It's a front-line therapy for bile duct cancer. The company is also planning a phase 3 trial for bladder cancer.
BridgeBio is a fascinating small-cap biotech stock. It has near term catalysts, as several of its drugs are in phase 3 trials. And it also has a huge pipeline of drugs to spur future growth. On the other hand, its $3 billion market cap is over four times bigger than MeiraGTx's valuation. And MGTX has an impressive pipeline of its own, with six molecules in clinical trials. I'm bullish on both companies, but given the price differential, I'd favor MeiraGTx right now.
