In this article, we will be taking a look at the 10 best small-cap biotech stocks with massive potential according to hedge funds.
Revolutionizing Healthcare and Economy: The Rapid Growth of Biotechnology
The biotechnology sector is expanding quickly due to rising demand for novel therapies, technological advances, and government assistance. Advances in fields like gene editing, sequencing, personalized medicine, and artificial intelligence are making new techniques possible, while the aging population and growing healthcare demands are driving a robust market for new treatments. According to a report by McKinsey & Company, venture capital firms made approximately $52 billion in global investments in therapeutic-focused biotech companies between 2019 and 2021. Two-thirds of this sum was given to platform-tech start-up companies.
Despite its growth, many biotech companies have faced challenges in turbulent markets, taking drastic measures such as cutting programs and implementing significant layoffs to conserve cash. While recent rate cuts could encourage the revival of scientific projects, analysts like Jared Holz note the difficulty of gauging their impact. Holz also highlighted a shift in market dynamics, observing that biotech’s performance increasingly correlates with small-cap equities. If small-cap stocks trade well, biotech is likely to follow, though stagnation could occur if momentum fades. Notably, the idea of interest rates predicting biotech success is relatively new, emerging only after the pandemic, which reshaped the industry by driving substantial investment into therapeutic-focused companies.
With innovative treatments, biotech businesses are revolutionizing healthcare by tackling important unmet medical needs. Establishing the National Bioeconomy Board as a component of Biden’s Investing in America agenda is a significant breakthrough. It seeks to maximize biotechnology’s economic potential in the United States.
Furthermore, policy suggestions to expedite the approval process for biotechnology goods are being developed by the National Security Commission on Emerging Biotechnology. More academics will be able to use biotechnology for agricultural purposes if entry obstacles are reduced, which will benefit American farmers and increase food security. It is anticipated that these initiatives will open up new markets.
Pharmaceuticals as Defensive Investments and the 2024 Healthcare Market Outlook
This year (2024) started strongly for the biotechnology sector due to a rise in mergers and acquisitions as well as anticipations of falling interest rates. Therefore, estimates suggest that the worldwide biotechnology market might increase at a compound annual growth rate (CAGR) of around 14% from 2024 to 2033, reaching an astonishing $5.7 trillion. The market for agricultural biotechnology is also expected to develop at a 7.9% compound annual growth rate (CAGR) and reach $232 billion by 2032.
But even with the market’s potential, investing in biotech companies still carries a number of serious dangers. Bankruptcy may result from failing to satisfy clinical trial endpoints or obtain adequate finance before a product launch. In the biotech industry, where drug development usually takes more than ten years and has an estimated failure rate of about 90%, the danger of failure is very substantial. Hence, biotech stocks are often considered “high-risk, high-reward” investments due to their upside potential coupled with significant risks
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Our Methodology
In our methodology, we identified the top small-cap biotech stocks with significant growth potential, ranked according to their total hedge fund holdings as of Q2 2024. Our selection process began by filtering companies with a small market capitalization. Next, we reviewed analyst recommendations, focusing on stocks with strong bullish sentiment and high institutional ownership. Finally, we ranked these companies based on the number of hedge funds holding their shares as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Here is our list of the 10 best small-cap biotech stocks with massive potential according to hedge funds.
10. Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP)
Number of Hedge Fund Holdings: 25
Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP) is a precision oncology company focused on developing innovative therapies for cancer treatment. At its core, the company is working on creating drugs that target specific biological pathways involved in cancer growth and progression. The corporation’s primary focus is on developing two key experimental drugs: CRB-701, an antibody-drug conjugate (ADC) targeting Nectin-4 on cancer cells, and CRB-601, an anti-integrin monoclonal antibody that blocks TGFβ activation. These drugs are designed to treat solid tumors, with potential applications in urothelial, lung, breast, and prostate cancers.
Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP) recently completed enrollment for the dose escalation part of its Phase 1 clinical trial for CRB-701, with data expected in early 2025. Additionally, new pre-clinical data for CRB-913 was presented at Obesity Week 2024, showing promising results in weight loss.
Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP) is recognized as a promising small-cap biotech stock with significant potential. The company has experienced fluctuations in its financial performance. For the third quarter of 2024, the corporation reported a net loss of approximately $13.8 million, compared to a net loss of $10.1 million in the same period in 2023. The increase in net loss is primarily attributed to higher operating expenses, which rose by $6.0 million due to increased clinical trial costs for CRB-701 and IND-enabling studies for CRB-913.
As of Q3 2024, 25 hedge fund holders held stakes in the company with Cormorant Asset Management being the largest stakeholder with holdings worth $48.9 million, as tracked by the Insider Monkey database. Street analysts hold a consensus Strong Buy rating on the stock with an average price target of $88.00. This reflects a 78.39% increase from the current price of $49.33.
9. Scholar Rock Holding Corporation (NASDAQ:SRRK)
Number of Hedge Fund Holdings: 26
Scholar Rock Holding Corporation (NASDAQ:SRRK) is a biopharmaceutical company focused on developing innovative therapies for serious diseases. At its core, the company specializes in discovering and developing drugs that target growth factors, which are proteins that play crucial roles in various cellular processes.
Scholar Rock Holding Corporation (NASDAQ:SRRK) is emerging as one of the best biotech stocks, with its lead candidate, apitegromab, showing significant promise in treating SMA. The positive Phase 3 SAPPHIRE trial results highlighted meaningful motor function improvements, and the company plans to submit U.S. and EU regulatory applications in Q1 2025, paving the way for a potential commercial launch. Additionally, apitegromab’s Phase 2 EMBRAZE trial for obesity could broaden market opportunities, with topline data expected in Q2 2025.
Financially, Scholar Rock Holding Corporation (NASDAQ:SRRK) reported $463.5 million in cash following an October 2024 public offering, extending its runway into late 2026. R&D expenses increased to $48.7 million in Q3 2024, reflecting its commitment to advancing its pipeline. Investors are drawn to its innovative myostatin inhibition approach, strong clinical data, diversified programs in SMA, obesity, and oncology, and solid financial foundation.
As of Q3 2024, 26 hedge funds held stakes in the company with Samsara BioCapital being the largest stakeholder in the company with stakes worth $54.3 million. Street analysts have given the stock a Strong Buy rating. The average price target is $30.67 for Scholar Rock Holding Corporation (NASDAQ:SRRK), with a high of $34.00 and a low of $28.00. This reflects a 270.86% increase from the current price of $8.27.
8. Akero Therapeutics, Inc. (NASDAQ:AKRO)
Number of Hedge Fund Holdings: 30
Akero Therapeutics, Inc. (NASDAQ:AKRO) is a clinical-stage biotechnology company focused on developing innovative treatments for serious metabolic diseases, particularly non-alcoholic steatohepatitis (NASH). The company’s primary focus is on advancing efruxifermin (EFX), their flagship drug candidate designed to treat metabolic dysfunction-associated steatohepatitis (MASH), formerly known as NASH.
A major catalyst for Akero Therapeutics, Inc. (NASDAQ:AKRO) is the positive clinical trial results for its lead product candidate, efruxifermin (EFX), in treating NASH/MASH. In September 2022, the company announced that EFX successfully met the primary endpoint in its Phase 2b HARMONY trial, demonstrating significant improvements in liver fibrosis without worsening NASH.
Akero Therapeutics, Inc. (NASDAQ:AKRO) reported a Q3 2024 net loss of $72.71 million, up from $39.66 million in the same period last year, with a basic loss per share rising to $1.05 from $0.71. Operating expenses surged to $81.7 million, largely due to expanded clinical trials, while R&D expenses nearly doubled to $72.2 million which was driven by ongoing trials and manufacturing costs. Despite these losses, the company holds a strong cash position of $787.1 million, sufficient to fund operations into the second half of 2027. Akero Therapeutics, Inc. (NASDAQ:AKRO)’s strategic focus on the Phase 3 SYNCHRONY program for efruxifermin (EFX), targeting MASH, highlights its commitment to addressing a severe liver condition with a high unmet medical need, positioning EFX as a potential breakthrough treatment pending approval.
As of Q3 2024, there were 30 hedge funds that held stakes in the company with Alkeon Capital Management being the largest stakeholder in the company, according to Insider Monkey’s database. Street analysts hold a consensus Strong Buy rating on the stock. Over the past 3 months, analysts set a 12-month average price target of $50.00 for the company, with a high of $60.00 and a low of $38.00. This indicates an 85.46% increase from the current price of $26.96.