In this article, we will take a look at some of the small-cap drug manufacturing stocks that are highly favored by hedge funds. On February 16, Franklin Templeton shared its outlook on the biotechnology sector heading into 2026. After a prolonged stretch of uncertainty, the picture is starting to look a lot clearer for investors. For much of the recent past, policy noise around drug pricing, tariffs, and reimbursement rules kept investors on edge.
By late 2025, however, several of those headwinds had eased. Certain proposed pharma tariffs were delayed or scaled back, and pricing reform proposals were largely confined to targeted Medicaid changes. That shift in backdrop has allowed investors to refocus on what actually matters: the science, the pipelines, and the long-term fundamentals.
And on that front, biotech remains compelling. Innovation across new treatment areas and disease categories continues to drive the sector’s long-term growth potential. That said, not every company will benefit equally. Capital discipline and structural pressures are creating a real divide between companies with strong balance sheets and clear development strategies and those without.
Franklin Templeton’s message is straightforward: this is not a market where buying the whole sector makes sense. Being selective is everything right now.
So which drug manufacturing stocks are worth watching in 2026? Here’s a look at our 7 Best Small-Cap Drug Manufacturing Stocks to Buy According to Hedge Funds.
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Our Methodology
To identify relevant stocks for this article, we screened U.S.-listed drug manufacturers with market capitalizations between $300 million and $2 billion. Also, we shortlisted only stocks with at least 20% upside potential according to consensus as of the March 26 closing.
Next, we identified the number of hedge funds that held positions in these stocks by the end of the fourth quarter of 2025. Finally, we selected 7 stocks with the highest number of hedge funds holding stakes and ranked them in ascending order.
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 498.7% since May 2014, beating its benchmark by 303 percentage points (see more details here).
7. BioAge Labs Inc. (NASDAQ:BIOA)
BioAge Labs Inc. (NASDAQ:BIOA) is one of the 7 best small-cap drug manufacturing stocks to buy according to hedge funds.
On March 10, Citi maintained a Buy rating on BioAge Labs Inc. (NASDAQ:BIOA). The firm significantly increased its price target from $15 to $52, citing a compelling outlook as the company approaches proof-of-concept data for BGE-102.
Citi also sees significant commercial potential for the therapy across multiple indications, including peak U.S. sales of $9.5B for atherosclerotic cardiovascular disease and $2B for diabetic macular edema, supporting a more optimistic view of the company’s long-term growth trajectory.
On February 25, Oppenheimer began coverage of BioAge Labs Inc. (NASDAQ:BIOA) with a $60 price target and an Outperform rating. The firm is quite positive about the company’s lead compound, BGE-102, which can inhibit the NLRP3 pathway. This has recently received a lot of attention due to the potential of the compound in the reduction of cardiovascular risk, especially after the positive Phase 2 results from Ventyx Biosciences.
Oppenheimer points out the critical differentiation of the company’s compound in comparison to other adjacent NLRP3 and Interleukin compounds.
BioAge Labs Inc. (NASDAQ:BIOA) is engaged in developing therapeutic product candidates for metabolic diseases. Its product portfolio includes an NLRP3 inhibitor in Phase 1 of clinical trial and BGE-102. It is also working on APJ agonists for obesity.
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