Best Buys for 2021? Look at Small-Cap Biotechs

The Nasdaq Biotechnology Index has been setting new all time highs -- and many leading newsletter advisors expect this momentum to continue. In fact, biotech was one of the most popular sectors among advisors participating in MoneyShow's Top Picks 2021 report. Here's a look at some favorite ideas for those who understand the high risk and reward potential in the small-cap biotech space. John McCamant, The Medical Technology Stock Letter Vaxart is a leader in developing an oral vaccine for Covid-19 that would make it significantly easier to vaccinate the world. A pill can be stored at room temperature, no freezer/refrigeration required, given anywhere, no syringe/nurse required, provides mucosal immunity, stops virus before entering bloodstream. Vaxart is poised to deliver Phase 1/II data shortly for VXA-CoV2-1, which upon success will position it as a leader in the second wave of Covid-19 vaccines. The company's unique vaccine pill should garner both corporate and government partnerships around the world as the easy to manufacture, off the shelf oral vaccine addresses many of the shortcomings of 1st generation vaccines. In addition, Vaxart is on Operation Warp Speed's radar and is currently conducting a non-human primate study. In our view, positive Phase I/II data will serve as a major catalyst for VXRT in 2021. The stock is a buy under $15 with a target price of $30 per share. Richard Howe, Cabot Micro-Cap Insider The reason that I love investing in micro caps so much is because you can find growth companies trading at value prices. To buy a fast-growing large-cap stock, you have to pay up. Instead of paying 15x earnings, you have to pay 30x earnings, or if it's a tech company, 30x sales. In the micro-cap world, it's possible to find tiny companies growing at 40% per year trading at just 10x earnings. Let me introduce you to Medexus Pharma (Vancouver: MPD) . Medexus Pharma is a Canadian specialty pharma company that is growing at a rapid clip. Its drugs treat chronic conditions and as a result its business had limited headwinds from Covid-19. In March 2020, it completed a transformative acquisition of a drug call XINITY, which treats hemophilia. The transaction was transformative because Medexus got to acquire all the gross profits that the drug generates but only had to hire a few additional employees to support it. As a result, Medexus instantly transformed from a break-even company to a wildly profitable one. Revenue is growing at 44% per year and the company is on pace to generate $8 million of free cash flow. As such, the stock is trading at 11.6x free cash flow, an incredibly cheap valuation for a rapidly growing company. On an EV/Revenue basis, MEDXF trades at 1.1x while slower-growing peers trade at 3.6x. When cheap, fast-growing micro-caps get discovered by larger institutional investors, it's very easy to get multi-baggers. If Medexus traded in line with peers, it would be a $15 stock, implying almost 200% upside from its current price. Genia Turanova, Moneyflow Trader My top biotech pick for 2021 is Arrowhead Pharmaceutical , which operates in one of the most exciting areas of modern medicine -- one with numerous potential applications longer-term. Not to be confused with gene editing and gene therapy, gene silencing controls the flow of genetic information, and creates a turn-off switch for harmful genes before they're able to create proteins that damage the host. With the growing possibility of simply deactivating our unwanted genes, the implications for our health are enormous. Gene silencing is already studied as a potential treatment for viral infections, cardiovascular diseases, cancer, endocrine disorders, and more. No wonder the 2006 Nobel Prize went to two American biologists, Andrew Fire and Craig Mello, for their 1998 discovery of the RNA interference (RNAi) mechanism, or gene silencing, in living cells. (RNA, or ribonucleic acid, is the part of the gene responsible for protein synthesis.) Arrowhead's RNAi gene silencing technique can target and shut down specific genes that cause certain disease. Armed with this technology, ARWR targets all diseases that could be helped by its technology. Unlike many similar-sized biotechs, it's not focused solely on rare diseases (or small markets). Biotechs are risky because there's always a possibility something could go wrong... or that the original thesis or technology doesn't live up to its early promise. Even if a company's approach works, most biotechs are years -- if not decades -- away from making money off their inventions. This risk isn't as pronounced for Arrowhead because the company already has 13 drug candidates based on its gene silencing technology and its Targeted RNAi Molecule (TRiM) platform. Going forward, this ambitious biotech plans to introduce three new drug candidates into clinical studies every year. The main focus is currently on liver diseases -- but ARWR also has one drug candidate for cancer and three potential drugs for the lungs (including one that targets Covid and future pulmonary-borne pathogens). ARWR is one of the brightest stars in the mid-cap biotech universe. Adam Johnson, Bullseye Brief Nine Meters Biopharma is a biotechnology company focusing on patients with gastrointestinal issues for which no treatments currently exist. The pipeline includes two drug candidates, one for Celiac disease and one for short bowel syndrome. Celiac disease is an autoimmune functional GI disease characterized by an inflammatory response to dietary gluten, causing abdominal pain and gas that are often severe and life-altering. Short bowel syndrome is a life-altering, life-threatening orphan disease caused by a significant shortening of the gastrointestinal (GI) tract. It leads to impaired nutrient absorption, diarrhea and metabolic complications. The first drug candidate, oral larazotide, represents the only Phase III therapeutic in development for Celiac disease, with interim analysis expected in the second half of 2021. Larazotide prevents the gluten breakdown product gliadin from entering systemic circulation and propagating an inflammatory response. Nine Meters aims to introduce larazotide as an adjunctive therapy in celiac disease to restore physiology, minimizing symptoms in tandem with a gluten-free diet. The second drug candidate is a long-acting, injectable NM-002, specifically designed to address the gastric effects in short bowel syndrome patients by slowing digestive transit time. NM-002 uses a proprietary technology to extend the half-life of the GLP-1 peptide, allowing for once- to twice-per-month dosing, which considerably increases convenience for patients and caregivers. Each of these treatments has demonstrated strong initial success, and may prove effective for additional indications beyond the current trials. The critical Phase III trial for Celiac will produce data in early 2021, while the drug candidate for SBS has received orphan drug status from the FDA and accelerated Phase II trials began in September. Notably, the recent recapitalization was spearheaded by well-known biotech specialist OrbiMed Advisors, which retains a seat on the board. Matthew Timpane, Schaeffer's Investment Research California-based medical device maker Fulgent Genetics specializes in clinical diagnostic genetic sequencing, and was at the forefront of the pandemic thanks to its RT-PCR Covid-19 test. While hopefully the pandemic is firmly put in the rearview mirror for 2021, FLGT should still be on your radar as your prep your investing strategy for the next year and beyond. After spending the last four months in a consolidating pattern, Fulgent Genetics stock looks ready to break out from an ascending triangle to fresh all-time highs. Its recent pullbacks were contained by its 40-day moving average, while breathers back to the 20-week moving average also presented numerous buying opportunities throughout 2020. Yes, the equity ended the year up a sizable 301%, but the company's conservative balance sheet still makes it undervalued compared to its peers in the medical device industry. Technical tailwinds could come from an exodus of short-sellers. Short interest is down 12.3% in the most recent reporting period, rolling over from all-time high levels. However, a healthy 23.1% of FLGT's total available float is still sold short, an ample amount of buying power that could hit the market and fuel an unwind. Many analysts regard Fulgent's kits as temporary with multiple vaccines on the way. Yet even amid an efficient vaccine rollout, Covid-19 testing will likely remain a key component of healthcare for the next few years. Beyond Covid-19, genetic testing is here to stay. Fulgent's core genetics testing division grew by 52%. Fulgent offers 18,000 genetic tests -- thousands more than the competition. It's not unreasonable to suggest FLGT stock could benefit if the company continues to cement its position at the forefront of genetics testing. Nate Pile, Nate's Notes MannKind was our Top Pick last year, and the stock gained 143%. I continues to recommend the stock as favorite idea for 2021. This a small biopharmaceutical company with cutting-edge technology for delivering drugs directly through the lungs. Its lead product is Afrezza, an FDA-approved form of inhalable mealtime insulin that is much faster acting than other insulins and has shown itself to be superior in virtually every way to all of the injectable mealtime insulins currently on the market for people with type 1 and type 2 diabetes. Though it has proven to be a slow and challenging process to migrate diabetics from their old ways of managing to diabetes to something new, the company is finally building some nice momentum on this front. The trend is being helped along in no small part by the fact that as more and more diabetics start using continuous glucose monitors (CGMs) to track their blood sugars in real time, they naturally start to also want an insulin that essentially works in real time -- something none of the injectables can do, but Afrezza does with ease once patients have learned how to use it. The company has also licensed its Technosphere drug delivery technology platform (which tends to speed up onset and improve efficacy for drugs usually taken in pill form, for example) to other companies for other drugs. The most of exciting of these deals at the moment is one with United Therapeutics to develop an improved version of treprostinil, a drug that is used to treat pulmonary arterial hypertension. MannKind has also licensed the Technosphere technology to Receptor Life Sciences, a private company that is developing pharmaceutical grade drugs in the cannabinoid space. After being crushed by a massive wave of short-selling over the past couple of years, short interest was more than cut in half during 2020 -- and though still oversized, short interest is continuing to shrink as the stock continues to rise). MNKD is a strong buy under $5 and a buy under $10. Tom Bishop, BI Research Anavex Life Sciences , which is working on a number of central nervous system (CNS) diseases, more than doubled in 2020 on more good trial results in Parkinson's Disease Dementia (PDD) and Rett syndrome. Meanwhile, its Phase 2b/3 Alzheimer's trial is nearing full enrollment, and recently reported Phase 2 PDD success on dementia was encouraging in this regard. In fact, the PDD trial results were accepted and presented at an Alzheimer's conference. Clinical trial results to date for Anavex 2-73 (oral) in all of these diseases have been consistently very positive. For example, in a Phase 2a Alzheimer's trial those given the high dose of Anavex 2-73 saw very minimal decline in scores on the mini mental state exam and activities of daily living after 148 weeks as compared to a considerable (normal) decline in those on the low dose. Nothing on the market today can come even close to this. $10 billion is a reasonable estimate for sales of an Alzheimer's drug that actually works (nothing on the market really does so far). And if the shares traded at just 1-2 times revenues (low for this industry), that would be a market cap of $10-$20 billion, not counting success with Rett or PDD. And even using 50% more shares than are outstanding today, that works out to $100 to $200 a share. Of course the company would be taken over long before that if the later stage trials continue as successfully as they have to date. So the company just has to continue to table data in late stage trials that is comparable to that reported so far. Also noteworthy, the Michael J. Fox Foundation (for Parkinson's) has recently agreed to provide funding of $1 million for an imaging-focused Parkinson's Disease trial of Anavex 2-73 (previously the MJF Foundation sponsored a preclinical trial with encouraging results.). The impact on Parkinson's Disease symptoms from the Parkinson's Disease Dementia trail are also pending. Lot's of potential here. Jay Silverman, The Medical Technology Stock Letter Celldex Therapeutics has developed CDX-0159, an anti-C-KIT antibody that has blockbuster potential in various mast cell diseases. CDX-0159 is a humanized monoclonal antibody that specifically binds the receptor tyrosine kinase KIT (also called stem cell factor or SCF) with high specificity and potently inhibits its activity. KIT is expressed in a variety of cells, including mast cells, which mediate inflammatory responses such as hypersensitivity and allergic reactions. KIT signaling controls the differentiation, tissue recruitment, survival and activity of mast cells. In certain inflammatory and allergic diseases, such as chronic urticaria, mast cell activation plays a central role in the onset and progression of the disease. KIT inhibition is involved in the potential treatment of various multi-billion acute and chronic conditions. With a market cap of ~$700 million and ~$200 million in cash, in our view, CLDX is extremely undervalued based on the potential of CDX-0159 alone. When compared with the a $7+ billion market cap for Allakos -- another mast cell targeted company -- it appears even more undervalued to us. After releasing highly positive initial clinical data resulting in significant mast cell depletion and a clean safety, two Phase 1 trials in urticaria (rash/hives) were initiated in the fall. These clinical trials are relatively quick to perform as trials go and data are released. Data from the first study is due by March 2021. We recommend shares of CLDX. Several new top-tier biotech investors seem to agree as they have begun to accumulate positions. Lastly, as a wholly owned asset, we also think that CLDX is an attractive takeover candidate. CLDX is a buy under $20 with a target price of $30.

Best Buys for 2021? Look at Small-Cap Biotechs

Eight favorite stock ideas in the small-cap biotech space.

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