In this piece, we will take a look at the ten best small cap pharma stocks to buy. If you want to skip a primer on small cap investing and want to jump ahead to the top five stocks in this piece, then head on over to 5 Best Small Cap Pharma Stocks to Buy.
The pharmaceutical industry is one that has profited a lot from the computing revolution. Throughout the years, and especially in the wake of the coronavirus pandemic, a handful of biotechnology stocks have soared. For instance, BioNTech SE (NASDAQ:BNTX), one of the manufacturers of the coronavirus vaccine, has seen its shares jump by 661% in the past five years despite the fact that they are now trading at roughly $105 – levels significantly below the late 2021 peak which saw the share price touch nearly $400. Moderna, Inc. (NASDAQ:MRNA)’s shares have grown by slightly less, but like BioNTech, have dropped from what were perhaps record high levels in 2021.
On a broader level, the pharmaceutical industry is made up of both biotechnology companies and giants such as Pfizer Inc. (NYSE:PFE) and Eli Lilly and Company (NYSE:LLY). These companies have market capitalizations in hundreds of billions of dollars and they sell pharmaceutical and biopharmaceutical products. And quite interestingly, the returns of the biotechnology and the pharmaceutical sector have been nearly similar over the past two decades or so. The iShares Biotechnology ETF (NASDAQ:IBB), which has been trading since early 2001 is up by roughly 280% since then while the iShares U.S. Pharmaceuticals ETF (NASDAQ:IHE) has gained close to 265% since 2006. During the same time period, the S&P500 index has returned roughly 214% since 200 – implying that the two exchanged traded funds that broadly target the biotechnology and the pharmaceutical companies have somewhat outpaced a broader collection of well running firms in lucrative industries.
This out performance by the pharmaceutical sector comes despite the fact that Pfizer Inc. (NYSE:PFE) is actually trading below the levels it was trading at the turn of the century in 2000 as its stock was hovering around $40 in 1999 but is currently trading around $36. Pfizer, like other firms, also benefited from the heightened interest in the medicine industry after the coronavirus pandemic, especially since its vaccine demonstrated high efficacy in combating the virus. Yet, even as Pfizer’s share price is wrought with cyclicality, Eli Lilly and Company (NYSE:LLY)’s shares have gained more than 600% since 2000 – so if you had invested a $1,000 in the stock back then, your money would have been worth $6,000 by now.
Since it is both a stable and a highly growing sector at the same time, the pharma industry is made up of all types of firms. Some of these heavily invest in research and development and operational expansion while others payout dividends. Dividend stocks offer a nice advantage of an added payout from the stock which can either be reinvested or used elsewhere. Our take on the 12 Best Pharma Dividend Stocks To Buy in 2023 shows that the dividend yields in the sector for stocks that hedge funds have piled into can range between 5.4% to 0.6% with most of the values ranging around 3%.
As a whole, the pharmaceutical industry was slated to be worth a massive $1.5 trillion in 2022 and it is expected to grow at a compounded annual growth rate (CAGR) of 7.7% to sit at $2.1 trillion by the end of 2026. The sector is expected to benefit from a growth in global population age as more seniors and others require regular medication for everyday diseases such as hypertension and diabetes. This growth is projected despite the relatively stringent regulatory requirement for some hot sectors such as precision medicine which have seen 450 drugs withdrawn since the late 90s due to adverse reactions.
Our detailed take on the pharmaceutical industry highlights growth and disruption areas, with generics posed to threaten the position of established companies and revolutionizing treatments for previously un treatable ailments such as the human immunodeficiency virus (HIV) changing the landscape of global medicine and promising products that were once thought to be unachievable. As to how generics threaten the position of established companies, well, once the patents expire the same medicines are manufactured by several other firms which reduces prices and steals market share from the incumbents.
Small cap stocks are some of the trickier investments since while the low share price has the potential for explosive share price growth, the stock can be liquid and cause equally large losses. Several financial executives have shared their belief that 2023 might be the year for small cap investing. For instance, Jonathan Boyar of Boyar Value believes that the small cap sector was one of the cheapest in the market in February, while Bank of America’s head of small cap strategy echoed similar sentiments during the time when she shared that in the case of a recessionary downturn, small cap stocks might provide greater downside protection when compared to large cap stocks.
As to what’s in store for the pharma sector, here’s what the management of Eli Lilly and Company (NYSE:LLY) had to say during the firm’s Q1 2023 earnings call:
In Q1, revenue declined 11% versus Q1 2022. When excluding revenue from COVID-19 antibodies, revenues increased 10% or 12% on a constant currency basis, highlighting solid momentum for our business despite a substantial headwind from a loss of exclusivity in the United States, which did not yet face meaningful generic competition in the base period. Gross margin as a percent of revenue increased 230 basis points to 78.4% in Q1 2023. The increase in gross margin percent was driven primarily by lower sales of COVID-19 antibodies, partially offset by lower realized prices. Total operating expenses increased 15% this quarter.
Marketing, selling and administrative expenses increased 12%, driven by higher marketing and selling expenses associated with recent and upcoming product launches and indications. R&D expenses increased 23%, driven by higher development expenses for late-stage assets. This quarter, we recognized acquired IP R&D charges of $105 million or $0.10 of EPS. In Q1 2022, acquired IP R&D and development milestone charges totaled $166 million or $0.15 of EPS. Operating income decreased 38% in Q1, driven by lower revenue, primarily due to 0 sales of COVID-19 antibodies this quarter, paired with higher R&D and SG&A expenses. Operating income as a percent of revenue was 23% for the quarter and reflected a negative impact of approximately 150 basis points attributable to acquired IP R&D charges.
With these details in mind, let’s take a look at some great small cap pharma stocks out of which the top picks are Collegium Pharmaceutical, Inc. (NASDAQ:COLL), Pacira BioSciences, Inc. (NASDAQ:PCRX), and Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN).
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Our Methodology
To compile our list of the top small cap pharma stocks to buy, we first made a list of top 20 small cap companies in the generic and specialty drug manufacturing sectors with the highest market capitalization. Then, the number of hedge funds that had held their shares as of Q1 2023 end was determined through Insider Monkey’s database of 943 hedge funds. Out of these, the top ten small cap pharma stocks are as follows. While biotechnology companies do make medicine, the fundamental difference in the raw materials used by them and pharma companies made us exclude them from our list.
10 Best Small Cap Pharma Stocks to Buy
10. Avadel Pharmaceuticals plc (NASDAQ:AVDL)
Number of Hedge Fund Investors in Q1 2023: 19
Avadel Pharmaceuticals plc (NASDAQ:AVDL) is an Ireland based drug manufacturer. It primarily manufactures and sells treatments for sleep disorders. The firm is seeing strong analyst sentiment over the past four months, as out of the 28 analysts that have covered the stock between April and July, 12 gave it a Strong Buy rating. Naturally, the average share rating is also a Strong Buy and the average stock price is $19.33.
As of March 2023, 19 of the 943 hedge funds part of Insider Monkey’s database had bought a stake in Avadel Pharmaceuticals plc (NASDAQ:AVDL). Out of these, the firm’s largest investor is Jeffrey Gendell’s Tontine Asset Management with a $48.5 million stake.
Along with Pacira BioSciences, Inc. (NASDAQ:PCRX), Collegium Pharmaceutical, Inc. (NASDAQ:COLL), and Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN), Avadel Pharmaceuticals plc (NASDAQ:AVDL) is a hot small cap pharma stock that hedge funds are piling into.
9. Amarin Corporation plc (NASDAQ:AMRN)
Number of Hedge Fund Investors in Q1 2023: 19
Amarin Corporation plc (NASDAQ:AMRN) is a global pharmaceutical firm with operations in different countries including the U.S. and the U.A.E. The firm has been undergoing a management shift as of late since it appointed a new chief executive officer in July.
After sifting through 943 hedge funds for their first quarter of 2023 shareholdings, Insider Monkey discovered that 19 had invested in the firm. Kamran Moghtaderi’s Eversept Partners is Amarin Corporation plc (NASDAQ:AMRN)’s largest shareholder in our database through an investment of $21 million.
8. Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD)
Number of Hedge Fund Investors in Q1 2023: 20
Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) employs a little over two hundred people and develops treatments for bowel system disorders and diseases in organs in the surrounding areas. The shares haven’t performed well as of late, as while they are up 2.75% over the month, the stock is down over longer time periods.
As part of their March quarter of 2023 investments, 20 of the 943 hedge funds polled by Insider Monkey had bought Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD)’s shares. The company’s largest hedge fund shareholder is Alex Denner’s Sarissa Capital Management with a $172 million stake.
7. Harrow Health, Inc. (NASDAQ:HROW)
Number of Hedge Fund Investors in Q1 2023: 21
Harrow Health, Inc. (NASDAQ:HROW) provides materials that are used in developing eye medicines. Additionally, it also sells treatments for diseases of different eye components such as the cornea. The firm is also funding its growth these days and announced a stock sale in July to cover the costs of an acquisition.
Insider Monkey’s 943 hedge fund survey for 2023’s first quarter revealed that 21 had invested in Harrow Health, Inc. (NASDAQ:HROW).
6. Dynavax Technologies Corporation (NASDAQ:DVAX)
Number of Hedge Fund Investors in Q1 2023: 21
Dynavax Technologies Corporation (NASDAQ:DVAX) develops treatments for serious diseases such as Hepatitis B. The shares are rated strong Buy on average and have a sizeable upside of $10 through the average share price.
21 of the 943 hedge funds part of Insider Monkey’s Q1 2023 database had bought the firm’s shares. Dynavax Technologies Corporation (NASDAQ:DVAX)’s largest hedge fund investor out of these is David Kroin’s Deep Track Capital with a $62 million investment.
Collegium Pharmaceutical, Inc. (NASDAQ:COLL), Dynavax Technologies Corporation (NASDAQ:DVAX), Pacira BioSciences, Inc. (NASDAQ:PCRX), and Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) are some great small cap pharma stocks.
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Disclosure: None. 10 Best Small Cap Pharma Stocks to Buy is originally published on Insider Monkey.