In this article we present the list of 12 Best Small-Cap Biotech Stocks with Massive Potential According to Hedge Funds.
Alkermes plc (NASDAQ:ALKS), Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) and ImmunoGen, Inc. (NASDAQ:IMGN) are three biotech stocks that have massive potential according to some of the world’s top hedge funds. One of them even ranks among the 12 Best Performing Biotech Stocks in 2023.
Many of the best biotech stocks in the small-cap space haven’t had the kind of year that was expected of them by several analysts heading into 2023 however.
One of those analysts was Geoff Hsu of Orbimed Capital’s Biotech Growth Trust, who noted early in the year that the median market cap-to-net cash multiple of small-cap biotechs was at a 20-year low and that some of the best biotech stocks in the space were even trading for less than the net cash held on their balance sheets, a value disconnect that has partly resulted in 12 Cheap Biotech Stocks Smart Investors Are Piling Into.
Another firm bullish on the space was RBC Capital Markets, which predicted that a more permissive regulatory environment for drug approvals would lead to small-cap biotechs outperforming the market this year.
That optimism waned somewhat in early March though when it was announced that Dr. Billy Dunn, who lead the approval of neurology-based treatments for the FDA, was retiring effective immediately. Dunn was seen as a champion for the approval of treatments for neurological conditions, particularly in areas of unmet need.
Neurology-focused small-cap biotechs took a major hit following the announcement and the Nasdaq US Small Cap Biotechnology Index slumped by 16.4% during February and March. Citi Research analyst Neena Bitritto-Garg believes the market overreacted to the news, noting that the recent departures of several other key FDA executives could lead to an even more flexible agency when it comes to drug approvals.
The small-cap biotech index did rebound in the second quarter but has trended down for much of the past three months, save for a 13.3% climb since October 27. For the year, the index is down by 8.79%.
Financing their operations has proven to be particularly challenging for even the best biotech stocks over the past two years, particularly those in the small-cap space. Biotech financing fell heavily in 2022 across all investment types, which left 29% of U.S and European public biotechs with less than a year’s worth of cash on hand. That’s forced many small biotechs to curb costs while they wait out the capital markets or hang on until their next sales inflection point.
On the other hand, M&A activity is beginning to pick up again in the sector, with the best biotech stocks in the small-cap space becoming increasingly attractive to bigger industry players that are flush with cash and facing looming patent cliffs that could erode their top and bottom line results in the coming years.
One such example is DICE Therapeutics, Inc. (NASDAQ:DICE), which would’ve ranked fourth on our list of the best biotech stocks in the small-cap space based on hedge fund ownership as of June 30. The company was instead snatched up by Eli Lilly and Company (NYSE:LLY) for $2.4 billion, which represented a 40% premium on the stock’s average volume-weighted trading price during the 30 days leading up to the announcement.
Several of the best biotech stocks that remain on our list have also generated varying levels of takeover interest, which could spur major gains for investors should that interest manifest in a deal, which is why more than one of them cracked our list of the 10 Biotech Stocks with Biggest Upside.
Our Methodology
The following list of the best biotech stocks in the small-cap space has been curated using the latest 13F filings from the select group of hedge funds that Insider Monkey tracks. We follow hedge funds like Soros Fund Management because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q2 2023 reporting period.
12 Best Small-Cap Biotech Stocks with Massive Potential According to Hedge Funds
12. Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL)
Number of Hedge Fund Shareholders: 33
Smart money ownership of Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) slipped during Q2 but remains up by 43% since the third quarter of 2022. Healthcare-focused hedge fund Baker Bros. Advisors held the largest stake in MDGL as of June 30, owning 2.02 million shares. The fund added 470,648 shares of the company to its 13F portfolio during Q2.
Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) was one of the 5 Best Performing Biotech Stocks in 2022, gaining a phenomenal 243%. It’s been unable to carry that momentum over into 2023 however, losing nearly 50% of its value this year. While the investor fervor around MDGL’s lead candidate resmetirom has cooled in 2023, it nonetheless holds massive potential.
Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL)’s nonalcoholic steatohepatitis (NASH) treatment is currently being reviewed by the FDA and would be the first NASH treatment to receive approval should it succeed. Medical research firm Evaluate Pharma sees big things in resmetirom’s future, predicting the treatment could be pulling in over $2 billion annually by 2028.
11. Viridian Therapeutics, Inc. (NASDAQ:VRDN)
Number of Hedge Fund Shareholders: 33
ImmunoGen, Inc. (NASDAQ:IMGN), Alkermes plc (NASDAQ:ALKS), and Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) are slightly more popular biotech investments among hedge funds than Viridian Therapeutics, Inc. (NASDAQ:VRDN), but smart money ownership of VRDN did rise slightly in Q2. Peter Kolchinsky’s RA Capital Management and Joseph Edelman’s Perceptive Advisors are among the leading shareholders of Viridian as of June 30.
Viridian Therapeutics, Inc. (NASDAQ:VRDN) shares have fallen steeply since the middle of June, losing over half their value. The biotech specializing in rare diseases is in the midst of a leadership change, with former Magenta Therapeutics president Steve Mahoney taking over the reins of the company on October 30. The company also announced a $185 million private placement, which is expected to cover its expenses for several years.
The initial market reaction to the news was positive, as shares gained nearly 10% that morning. Analysts also see tremendous upside for Viridian Therapeutics, Inc. (NASDAQ:VRDN), which reports trial results from its thyroid eye disease treatment VRDN-001 next year. Analysts have had a consensus ‘Strong Buy’ rating on VRDN for the last three months, with an average price target of $42.71, suggesting possible upside of more than 300%.
10. Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE)
Number of Hedge Fund Shareholders: 33
Hedge fund ownership of Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE) hit an all-time high in the second quarter and has climbed by more than 60% in less than two years, signaling it as one of the best biotech stocks for long-term growth. Panayotis Takis Sparaggis’ Alkeon Capital Management is the top Ultragenyx shareholder among the select group of funds tracked by Insider Monkey, owning over 1.94 million shares as of June 30.
Unfortunately for hedge funds and other shareholders of Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE), the company was among the 15 Worst Performing Biotech Stocks in 2023 as of early August. RARE shares have lost 20.8% of their value this year. Ultragenyx grew sales by 21% year-over-year in Q2 lead by Chysvita, which pulled in $83 million.
Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE) has another bone disease-related treatment in its pipeline, setrusumab, which has displayed promising results for the treatment of brittle bone disease. In a phase 2 dose-finding study of the treatment, 20mg of setrusumab improved patients’ mineral deficit by about 33% on average.
Canaccord analyst Whitney Ijem is encouraged about the company’s progress across multiple fronts following its recent analyst day, noting the positive results from trial data for both GTX-102 and UX701. The analyst raised the firm’s price target on RARE to $107 from $90 and has a ‘Buy’ rating on it.
9. Ventyx Biosciences, Inc. (NASDAQ:VTYX)
Number of Hedge Fund Shareholders: 33
Shareholders of Ventyx Biosciences, Inc. (NASDAQ:VTYX) have enjoyed far more fruitful returns of late than shareholders of Ultragenyx, with the stock ranking among the top Long-Term Returns of Dan Loeb’s 5 Activist Targets. Loeb began unloading his stake in VTYX in the third quarter of 2022 after shares soared by 177% during that quarter. He sold off the remainder of his stake the following quarter.
Ventyx Biosciences, Inc. (NASDAQ:VTYX) shares performed well throughout much of 2023, but have cratered since September 28, losing 59.1% of their value. While Loeb decided to sell high on the stock, numerous other hedge funds appear to be in for the long haul, as smart money ownership of Ventyx has doubled in the last year.
Ventyx Biosciences, Inc. (NASDAQ:VTYX) announced phase 2 trial results from VTX002 for the treatment of ulcerative colitis (UC) on October 9. The study’s primary endpoint of clinical remission was achieved by 28% of patients taking a 60mg dose of the treatment, compared to just 11% of patients given a placebo. While solid, investors are concerned that the results weren’t strong enough to elevate VTX002 above competing treatments etrasimod and Zeposia, sending VTYX shares down by 25.9% on October 10.
8. Cytokinetics, Incorporated (NASDAQ:CYTK)
Number of Hedge Fund Shareholders: 34
Unlike the prior two biotechs, hedge funds have soured somewhat on Cytokinetics, Incorporated (NASDAQ:CYTK) in recent quarters. Ownership of CYTK has dropped in each of the past three quarters, falling by more than 15%. Brian Ashford-Russell and Tim Woolley’s Polar Capital owns over 2.65 million shares of Cytokinetics and has ranked as the top shareholder of the company for the last year.
Cytokinetics, Incorporated (NASDAQ:CYTK) shares had fallen by 39.4% year-to-date as of October 3, but have rallied in the past four weeks, gaining 30.6%. Cytokinetics has received takeover interest from a Swiss pharmaceutical company according to an October 31 report by Bloomberg, which came on the heels of an earlier rumor that the company was working with an investment bank to explore its options.
Analysts have been bullish on Cytokinetics, Incorporated (NASDAQ:CYTK)’s SEQUOIA-HCM phase 3 trial for symptomatic obstructive hypertrophic cardiomyopathy, citing the study’s favorable patient mix and patients’ severe deficit in exercise capacity, which is expected to highlight the treatment’s positive effect on peak oxygen uptake during exercise. JMP Securities has a ‘Buy’ rating and $71 price target on the stock.
7. Day One Biopharmaceuticals, Inc. (NASDAQ:DAWN)
Number of Hedge Fund Shareholders: 34
Day One Biopharmaceuticals, Inc. (NASDAQ:DAWN) is one of the 25 Biggest Stocks with Negative Beta, which could make it a good hedge against the broader market and one of the best biotech stocks for contrarian investors. Whether due to its beta or other factors, hedge funds were jumping all over DAWN in Q2, with ownership of the biotech jumping by more than 50% during the quarter.
Day One Biopharmaceuticals, Inc. (NASDAQ:DAWN) shares have rallied by 31.8% since October 20, though they remain down by 37% this year. The clinical stage biotech’s leading candidate is tovorafenib, an investigational oral therapy for the treatment of pediatric low-grade glioma. The company released early results from its phase 2 trial of the treatment in June, which showcased positive results.
Day One Biopharmaceuticals, Inc. (NASDAQ:DAWN) announced on October 30 that the FDA has accepted its new drug application (NDA) for the treatment and granted it priority review status, which Oppenheimer declared a “big win” for the company. Wedbush is also bullish on DAWN’s trajectory, having an ‘Outperform’ rating and $38 price target on the stock.
6. Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX)
Number of Hedge Fund Shareholders: 36
Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX) began attracting serious hedge fund interest in 2020, when the number of money managers long SNDX rose from just 11 at the start of the year to 39 by the end of it. Hedge fund ownership dipped after that for more than a year before rebounding in the fourth quarter of 2022.
Like many of the best biotech stocks on this list, Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX) shares trended down throughout much of 2023, but have rallied in recent weeks, gaining 29.9% since October 23. Derrick Tang’s Kynam Capital is the biggest Syndax Pharmaceuticals, Inc. (NASDAQ:SNDX) shareholder among the funds tracked by Insider Monkey’s database, owning over 3.26 million shares and having 9.39% 13F exposure to the stock as of June 30.
Syndax’s leading candidate is revumenib for the treatment of patients with relapsed/refractory leukemia. The company is in the process of submitting an NDA for revumenib, which it expects to finalize by the end of this year. Bank of America has a ‘Buy’ rating and $29 price target on revumenib and believes the treatment is capable of carving out a distinct niche in its category.
Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX), ImmunoGen, Inc. (NASDAQ:IMGN), and Alkermes plc (NASDAQ:ALKS) are three of the absolute best biotech stocks on the small-cap market according to hedge funds. See where they rank by clicking the link below.
5. Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX)
Number of Hedge Fund Shareholders: 36
The number of hedge funds long Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) has ticked up steadily over each of the past four quarters, more than doubling during that time. Despite the influx of new funds into Amylyx, Joseph Edelman’s Perceptive Advisors and Andreas Halvorsen’s Viking Global have remained the top AMLX shareholders for more than a year.
Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) shares have stumbled by 48.8% in 2023, with the latest blow coming in mid-October when the European Medicines Agency refused for a second time to recommend the company’s ALS treatment AMX0035 for marketing authorization in the EU. AMX0035 has already received FDA approval in the U.S as well as conditional approval in Canada.
Despite the recent setback, Mizuho Securities analyst Graig Suvannavejh maintained a ‘Buy’ rating on Amylyx Pharmaceuticals, Inc. (NASDAQ:AMLX) following the news, stating it wasn’t unexpected and had been somewhat baked into the stock’s 2023 struggles. He further noted that EU approval for AMX0035 could still be achieved following the conclusion of the late-stage study of the treatment, which is expected to wrap up around the middle of 2024. The analyst has a $48 price target on AMLX shares, more than twice their current value.
4. Vaxcyte, Inc. (NASDAQ:PCVX)
Number of Hedge Fund Shareholders: 37
There was a surge in hedge fund ownership of Vaxcyte, Inc. (NASDAQ:PCVX) during the second half of 2022, with the number of funds long PCVX more than doubling. Peter Kolchinsky’s RA Capital Management has an aggressive stake in Vaxcyte, owning over 7.89 million shares on June 30 worth over $394 million.
Vaxcyte, Inc. (NASDAQ:PCVX) shares have gained 7.52% this year, greatly outperforming the Nasdaq US Small Cap Biotechnology Index. They’ve been particularly robust since April 11, soaring by 46.4%. That surge began in earnest following the release of positive phase 2 trial data for VAX-24 in mid-April. The 24-Valent pneumococcal conjugate vaccine (PCV) candidate is being studied for the prevention of invasive pneumococcal disease (IPD). The company’s investigational drug application for VAX-31 was also cleared by the FDA in mid-October.
Bank of America has a $67 price target and ‘Buy’ rating on Vaxcyte, Inc. (NASDAQ:PCVX), with analyst Jason Gerberry pointing to the company’s manufacturing and supply agreement with Lonza as a huge boon. The agreement allows Vaxcyte to manufacture its vaccine candidates at a scale that would be challenging, if not impossible, for most small biotechs. The analyst also noted that Vaxcyte has maintained full ownership of its vaccines, with just a 4% royalty being owed out on future net sales.
3. ImmunoGen, Inc. (NASDAQ:IMGN)
Number of Hedge Fund Shareholders: 42
There was an even more dramatic leap in hedge fund ownership of ImmunoGen, Inc. (NASDAQ:IMGN) during Q2 than there was in DICE Therapeutics. The number of funds long IMGN doubled during the quarter to easily reach a new all-time high. Jeremy Green’s Redmile Group owns over 17.7 million ImmunoGen shares as of June 30.
ImmunoGen, Inc. (NASDAQ:IMGN)’s ovarian cancer treatment ELAHERE has shown promising results, achieving the primary endpoint in a recent trial. The company will release full data from the phase 3 trial next year and believes ELAHERE will hit an objective response rate of at least 48%. That could make it the current standard of care in FRα-positive, platinum-resistant ovarian cancer.
Analysts and hedge funds are divided over the drug’s sales potential however. The ClearBridge Multi Cap Growth Strategy thinks ELAHERE amounts to a “relatively modest opportunity” (more on that below), while others believe it has blockbuster potential. JP Morgan upgraded ImmunoGen to ‘Overweight’ from ‘Neutral’ in September, noting ELAHERE’s solid growth trajectory following its U.S launch. The firm has a $22 price target on IMGN.
The ClearBridge Multi Cap Growth Strategy sold off ImmunoGen, Inc. (NASDAQ:IMGN) in Q4 of last year, citing the company’s long road to profitability, which the fund discussed in its Q4 2022 investor letter:
“During the quarter we exited a position in ImmunoGen, Inc. (NASDAQ:IMGN), a biotechnology company developing antibody-drug conjugate therapies to treat cancer. ImmunoGen received FDA approval for Elahere for ovarian cancer, however it is a relatively modest opportunity and the company still faces a long road to reach meaningful profitability. The sale is also part of our effort to consolidate the portfolio in our highest conviction ideas.”
2. Alkermes plc (NASDAQ:ALKS)
Number of Hedge Fund Shareholders: 44
Alkermes plc (NASDAQ:ALKS) also hit an all-time high in hedge fund ownership during Q2, after steadily becoming more popular among top money managers over the past four years. Alex Denner’s Sarissa Capital Management already owned the largest ALKS stake heading into Q2, but raised the size of it by another 57% during the quarter to just over 14 million shares. The fund’s Alkermes position accounts for 43.7% of the value of its 13F holdings.
Alkermes plc (NASDAQ:ALKS) shares have slid by 26.3% since peaking towards the end of June. Preliminary results from the biopharmaceutical company’s phase 1 trial of narcolepsy treatment ALKS 2680 left investors questioning whether the drug remained active long enough for it to be a viable candidate for other sleep disorders.
Alkermes plc (NASDAQ:ALKS) is in the process of transitioning into a pure-play neuroscience company as it continues working towards the separation of its oncology business. Alkermes grew Q3 revenue by 51% year-over-year to $381 million, while non-GAAP net income jumped by $106 million to $109.5 million. Manufacturing and royalty revenue surged by 182% during the quarter. Piper Sandler maintained an ‘Overweight’ rating on Alkermes following the company’s Q3 earnings results, while Mizuho maintained its ‘Buy’ rating.
1. Apellis Pharmaceuticals, Inc. (NASDAQ:APLS)
Number of Hedge Fund Shareholders: 53
Hedge funds poured into Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) in even greater numbers during Q2, as the number of funds long APLS rose by 27% to reach a new all-time high and propel it to the top of the list of best small-cap biotech stocks. Kurt Von Emster’s VenBio Select Advisor owns an eye-popping 11,111,111 shares of APLS as of June 30.
Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) shares fell off a cliff in mid-July after the Research and Safety in Therapeutics (ReST) Committee of the American Society of Retinal Specialists raised safety concerns about the company’s eye treatment Syfovre. The company tried to calm investors by noting that incidences of occlusive retinal vasculitis, a form of severe eye inflammation that leads to loss of vision, were extremely rare. Analsyts weren’t convinced however, with several dramatically slashing their price targets on the stock in the wake of the news.
Those safety concerns overshadowed a strong Q2 earnings report for Apellis Pharmaceuticals, Inc. (NASDAQ:APLS), as Syfovre sales jumped to $67.3 million during the quarter from just $18.4 million in Q1, outpacing estimates. Those sales figures accounted for 71% of Apellis’ Q2 revenue, which is why so much rides on the market’s response to the latest safety concerns. If Syfovre’s sales continue to impress in the second half of this year, APLS could be poised for a big bounceback as worries over the impact those safety concerns will have on sales abates.
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Disclosure: None. 12 Best Small-Cap Biotech Stocks with Massive Potential According to Hedge Funds is originally published at Insider Monkey.
