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Top 5 Small-Cap Biotechnology Stocks for a Stable Portfolio
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The biotechnology industry had a rough first quarter after a decent performance in 2023. The majority of biotech players do not generate enough revenues to fund their operations and are dependent on external funds. A company starts generating revenues following a successful FDA approval and the launch of a drug.
Under this circumstance, a high interest rate regime is detrimental to the biotech industry. The primary reason for the industry’s weak performance year to date is that the Fed refrained from reducing the 23-year high interest rate, which is in the range of 5.25-5.5%, despite widespread expectation that the central bank will cut the benchmark lending rate by at least 75 basis points this year.
Nevertheless, on Jun 12, in his post-FOMC meeting statement, Fed Chairman Jerome Powell indicated one cut of 25 basis points in the Fed fund rate in 2024. Moreover, the latest “dot-plot” of the FOMC meeting hinted at a full 1% rate cut across 2025. Consequently, the terminal rate of the Fed fund rate currently stands at 4.1% by the end of 2025.
A low interest rate environment is likely to raise the margins of biotech players as these companies need huge capital to continue clinical studies before getting FDA approval. Therefore, things are likely to turn around in the second half of 2024.
Biotech companies are looking to bolster their product portfolios and pipelines through collaborations and buyouts. Hence, mergers and acquisitions are back in the spotlight. Given the continuous need for innovative medical treatments, irrespective of the state of the economy, the biotech industry can be a safe haven amid a volatile and uncertain macroeconomic environment.
An attractive pipeline candidate is the key lure for biotech companies. Cost synergies in research and development (R&D) are added benefits, as quite a few smaller biotech companies are using innovative technologies to develop drugs and treatments. With increasing R&D spend and most companies looking to diversify, new drug approvals are likely to see an acceleration going forward.
The Zacks-defined Biomedical and Genetics Industry is currently ranked in the top 34% of industries. Specifically, it is ranked number 85 among 249 industries. Because it is ranked in the top half of the Zacks-ranked industries, we expect it to outperform the market over the next three to six months.
Our Top Picks
We have narrowed our search to five small-cap (market capital < $1 billion) biotech stocks with strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our picks year to date.
Image Source: Zacks Investment Research
Arcutis Biotherapeutics Inc. (ARQT - Free Report) is a late-stage biopharmaceutical company. ARQT is focused on developing and commercializing treatments for unmet needs in immune-mediated dermatological diseases. ARQT’s product pipeline consists of ARQ-151, ARQ-154 and ARQ-252 for multiple indications, including psoriasis, atopic dermatitis, seborrheic dermatitis and eczema, which are in the clinical stage.
Arcutis Biotherapeutics has an expected revenue and earnings growth rate of more than 100% and 57.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 35.7% over the last 60 days.
Bicycle Therapeutics plc (BCYC - Free Report) is a clinical-stage biopharmaceutical company, which develops a class of medicines for diseases that are underserved by existing therapeutics in the United States and the United Kingdom. BCYC is focused on developing medicines, referred to as Bicycles, for diseases underserved by existing therapeutics.
Further, BCYC collaborates with biopharmaceutical companies and organizations to develop programs in therapeutic areas. BCYC has collaboration and license agreements with Bayer Consumer Care AG, Novartis Pharma AG, Cancer Research UK, Cancer Research Technology Ltd, and Oxurion NV.
Bicycle Therapeutics has an expected revenue and earnings growth rate of 55.4% and 12.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 14.6% over the last 60 days.
Castle Biosciences Inc. (CSTL - Free Report) is a commercial-stage dermatological cancer company. CSTL is focused on providing physicians and patients, with clinically actionable genomic information.
CSTL provides testing solutions for the diagnosis and treatment of dermatologic cancers, Barrett's esophagus, uveal melanoma, and mental health conditions. CSTL offers its products to skin cancer, gastroenterology, and mental health markets.
Castle Biosciences has an expected revenue and earnings growth rate of 18.7% and 20.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 15.8% over the last 30 days.
Prime Medicine Inc. (PRME - Free Report) is a biotechnology company that delivers genetic therapies to address the spectrum of diseases by deploying gene editing technology. PRME has a research collaboration with Cimeio Therapeutics to develop Prime Edited Shielded-Cell & Immunotherapy Pairs for genetic diseases, acute myeloid leukemia, and myelodysplastic syndrome.
PRME offers Prime Editors with a Prime Editor protein, comprising a fusion between a Cas protein and a reverse transcriptase enzyme, and a pegRNA, which targets the Prime Editor to a specific genomic location and provides a template for making the desired edit to the target DNA sequence.
Prime Medicine has an expected revenue and earnings growth rate of more than 100% and 19.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.9% over the last 60 days.
Lexicon Pharmaceuticals Inc. (LXRX - Free Report) is a leader in defining the functions of genes for drug discovery using large-scale knockout mouse technology. LXRX has invented high-throughput gene trapping technology to discover thousands of genes and expand its OmniBank vast library of mouse clones. LXRX uses an integrated platform of functional genomic technologies to accelerate large-scale analysis of mammalian gene function for drug discovery.
Lexicon Pharmaceuticals has an expected revenue and earnings growth rate of more than 100% and 11.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.8% over the last seven days.
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Top 5 Small-Cap Biotechnology Stocks for a Stable Portfolio
The biotechnology industry had a rough first quarter after a decent performance in 2023. The majority of biotech players do not generate enough revenues to fund their operations and are dependent on external funds. A company starts generating revenues following a successful FDA approval and the launch of a drug.
Under this circumstance, a high interest rate regime is detrimental to the biotech industry. The primary reason for the industry’s weak performance year to date is that the Fed refrained from reducing the 23-year high interest rate, which is in the range of 5.25-5.5%, despite widespread expectation that the central bank will cut the benchmark lending rate by at least 75 basis points this year.
Nevertheless, on Jun 12, in his post-FOMC meeting statement, Fed Chairman Jerome Powell indicated one cut of 25 basis points in the Fed fund rate in 2024. Moreover, the latest “dot-plot” of the FOMC meeting hinted at a full 1% rate cut across 2025. Consequently, the terminal rate of the Fed fund rate currently stands at 4.1% by the end of 2025.
A low interest rate environment is likely to raise the margins of biotech players as these companies need huge capital to continue clinical studies before getting FDA approval. Therefore, things are likely to turn around in the second half of 2024.
Biotech companies are looking to bolster their product portfolios and pipelines through collaborations and buyouts. Hence, mergers and acquisitions are back in the spotlight. Given the continuous need for innovative medical treatments, irrespective of the state of the economy, the biotech industry can be a safe haven amid a volatile and uncertain macroeconomic environment.
An attractive pipeline candidate is the key lure for biotech companies. Cost synergies in research and development (R&D) are added benefits, as quite a few smaller biotech companies are using innovative technologies to develop drugs and treatments. With increasing R&D spend and most companies looking to diversify, new drug approvals are likely to see an acceleration going forward.
The Zacks-defined Biomedical and Genetics Industry is currently ranked in the top 34% of industries. Specifically, it is ranked number 85 among 249 industries. Because it is ranked in the top half of the Zacks-ranked industries, we expect it to outperform the market over the next three to six months.
Our Top Picks
We have narrowed our search to five small-cap (market capital < $1 billion) biotech stocks with strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our picks year to date.
Image Source: Zacks Investment Research
Arcutis Biotherapeutics Inc. (ARQT - Free Report) is a late-stage biopharmaceutical company. ARQT is focused on developing and commercializing treatments for unmet needs in immune-mediated dermatological diseases. ARQT’s product pipeline consists of ARQ-151, ARQ-154 and ARQ-252 for multiple indications, including psoriasis, atopic dermatitis, seborrheic dermatitis and eczema, which are in the clinical stage.
Arcutis Biotherapeutics has an expected revenue and earnings growth rate of more than 100% and 57.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 35.7% over the last 60 days.
Bicycle Therapeutics plc (BCYC - Free Report) is a clinical-stage biopharmaceutical company, which develops a class of medicines for diseases that are underserved by existing therapeutics in the United States and the United Kingdom. BCYC is focused on developing medicines, referred to as Bicycles, for diseases underserved by existing therapeutics.
Further, BCYC collaborates with biopharmaceutical companies and organizations to develop programs in therapeutic areas. BCYC has collaboration and license agreements with Bayer Consumer Care AG, Novartis Pharma AG, Cancer Research UK, Cancer Research Technology Ltd, and Oxurion NV.
Bicycle Therapeutics has an expected revenue and earnings growth rate of 55.4% and 12.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 14.6% over the last 60 days.
Castle Biosciences Inc. (CSTL - Free Report) is a commercial-stage dermatological cancer company. CSTL is focused on providing physicians and patients, with clinically actionable genomic information.
CSTL provides testing solutions for the diagnosis and treatment of dermatologic cancers, Barrett's esophagus, uveal melanoma, and mental health conditions. CSTL offers its products to skin cancer, gastroenterology, and mental health markets.
Castle Biosciences has an expected revenue and earnings growth rate of 18.7% and 20.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 15.8% over the last 30 days.
Prime Medicine Inc. (PRME - Free Report) is a biotechnology company that delivers genetic therapies to address the spectrum of diseases by deploying gene editing technology. PRME has a research collaboration with Cimeio Therapeutics to develop Prime Edited Shielded-Cell & Immunotherapy Pairs for genetic diseases, acute myeloid leukemia, and myelodysplastic syndrome.
PRME offers Prime Editors with a Prime Editor protein, comprising a fusion between a Cas protein and a reverse transcriptase enzyme, and a pegRNA, which targets the Prime Editor to a specific genomic location and provides a template for making the desired edit to the target DNA sequence.
Prime Medicine has an expected revenue and earnings growth rate of more than 100% and 19.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.9% over the last 60 days.
Lexicon Pharmaceuticals Inc. (LXRX - Free Report) is a leader in defining the functions of genes for drug discovery using large-scale knockout mouse technology. LXRX has invented high-throughput gene trapping technology to discover thousands of genes and expand its OmniBank vast library of mouse clones. LXRX uses an integrated platform of functional genomic technologies to accelerate large-scale analysis of mammalian gene function for drug discovery.
Lexicon Pharmaceuticals has an expected revenue and earnings growth rate of more than 100% and 11.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.8% over the last seven days.