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Buy These 7 Small Drugmakers to Boost Your Portfolio's Health

Kinjel Shah

“Bigger isn’t necessarily better.” At present, this holds true for the specialty-pharma sector wherein smaller drugmakers are performing better than their larger counterparts.

These companies make medicines for both human and veterinary use mainly from small molecules and artificial materials.

Most of these drugmakers either have a small marketed 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 an equity investment is 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 have also benefited 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, frequent pipeline setbacks, drug pricing issues and rising competition. Successful innovation resulting in new drug approvals, important advances in clinical studies, strategic collaborations with strong partners and frequent M&A activity have kept these companies afloat in a competitive market.

The Zacks Medical-Drugs, which is a huge 172-stock group of drug companies 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. The Large Cap Pharma industry comprise some of the biggest drugmakers of the world.

Year-to-Date Price Performance

The stocks in the Medical-Drugs industry have collectively risen 6.3% year to date compared with 0.7% increase for the Zacks Medical sector. However, the Zacks Large Cap Pharma industry has gone down 2.4%.

 

 

Favorable Zacks Rank

The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #75, 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

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 in the past 60 days and stock price increases this year so far.

Verrica Pharmaceuticals VRCA

The Zacks #1 Ranked stock of this West Chester based clinical-stage medical dermatology company has risen 81.6% year to date. The consensus estimate for 2019 has narrowed from loss of $1.25 to $1.20 per share while that for 2020 has narrowed from a loss of $2.13 to $2.12 per share over the past 60 days.

Zoetis ZTS

Earnings estimates for this Parsippany, NJ based animal health drugmaker have risen 2.6% for 2019 and 1.3% for 2020 over the past 60 days. Zoetis’ stock has jumped 43.1% so far this year. It carries a Zacks Rank #2.

Catalyst Pharmaceuticals CPRX

The stock of this FL-based small drugmaker of rare diseases has risen 241.6% this year so far. Earnings estimates of this Zacks #2 Ranked stock have gone up from 11 cents to 34 cents for 2019 and from 35 cents to 60 cents for 2020 over the past 60 days.

Flexion Therapeutics FLXN

The #2 Ranked stock of this Burlington, MA based small drugmaker of anti-inflammatory medicines has risen 28% so far this year. The consensus estimate for 2019 has narrowed from loss per share of $4.07 to loss of $4.02 over the past 60 days.

Genocea Biosciences GNCA

This Cambridge, MA based small cancer drugmaker has seen its stock price rise 53.9% this year. The consensus estimate for 2019 has narrowed from loss per share of $2.82 to $2.13 while that for 2020 has narrowed from loss per share of $2.18 to $1.64 over the past 60 days. It carries a Zacks Rank #2.

Neurocrine Biosciences NBIX

Earnings estimates for this neuroscience-based company have risen from a loss of 6 cents to earnings of 68 cents for 2019 over the past 60 days. For 2020, earnings estimates have gone up from $2.98 per share to $3.36 per share over the same timeframe. Neurocrine’ stock has surged 42% so far this year. It carries a Zacks Rank #2.

Recro Pharma REPH

The Zacks #2 Ranked stock of this Malvern, PA based clinical-stage drugmaker of non-opioid pain medicines has risen 68.1% year to date. The estimate for 2019 has narrowed from loss per share of 54 cents to 48 cents over the past 60 days. Meanwhile, earnings estimates for 2020 have increased from 6 cents per share to 24 cents over the same timeframe.

 

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 companies and significantly hurt their share price. Nonetheless, considering their low price and bright growth prospects, these appear to be great investment opportunities currently.

Medical - Drugs Industry 5YR % Return

 

Medical - Drugs Industry 5YR % Return

Medical - Drugs Industry 5YR % Return

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Neurocrine Biosciences, Inc. (NBIX) : Free Stock Analysis Report
 
Genocea Biosciences, Inc. (GNCA) : Free Stock Analysis Report
 
Recro Pharma, Inc. (REPH) : Free Stock Analysis Report
 
Zoetis Inc. (ZTS) : Free Stock Analysis Report
 
Catalyst Pharmaceuticals, Inc. (CPRX) : Free Stock Analysis Report
 
Flexion Therapeutics, Inc. (FLXN) : Free Stock Analysis Report
 
Verrica Pharmaceuticals Inc. (VRCA) : Free Stock Analysis Report
 
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