Several biotech stocks in small-cap space didn’t see the kind of year which was expected from them by Wall Street analysts heading into 2023 however. RBC Capital Markets, a global investment management firm, anticipated that more permissive regulatory environment for drug approvals should result in top biotech stocks outperforming the market in 2023. This optimism was short-lived as, in early March, when it was announced that Dr. Billy Dunn was retiring. Just to let the readers know, Dr. Dunn used to lead the approval of neurology-based treatments for the US FDA. He has been tagged as a champion for approval of treatments in the area of neurological conditions, mainly in the fields of unmet need.
Neurology-focused small-cap bio-tech stocks saw a significant decline after the news broke and NASDAQ US Small Cap Biotechnology Index fell ~16.4% in February and March. Citi Research analyst Neena Bitritto-Garg mentioned that market overreacted to this news. According to the analyst, the recent departures of numerous other key FDA executives might lead to an even more flexible agency for approvals to drugs. Small-cap biotech index saw some rebound in 2Q, but the index has trended downwards for majority of the previous 3 months. For the year, this index has fallen by ~8.79%.
Funding the operations was particularly challenging for the best biotech stocks over previous 2 years, particularly those companies which are in the small-cap space. Financing for biotech stocks saw a significant decline in 2022 throughout all the investment types, leaving more than 25% of the US and European public bio-tech companies with less than year’s worth of cash.
As the result of this, several biotech companies decided to curb costs while they wait for some action in the capital markets or until they see next sales inflection point.
Top biotech stocks which are discussed below have seen varying levels of takeover interest, which might benefit investors as these stocks can gain significantly in case of the merger or takeover news.
With this in mind, we will now discuss top biotech stocks preferred by hedge funds.
1. Madrigal Pharmaceuticals, Inc.
The company is a clinical-stage biopharmaceutical company. It announced that the US FDA accepted New Drug Application and gave priority review for resmetirom regarding the treatment of adult patients with NASH with liver fibrosis.
US FDA gave Prescription Drug User Fee Act date for resmetirom of March 14, 2024. The Agency mentioned that it is not currently planning to hold advisory committee meeting to assess application.
As of September 30, 2023, the company held cash, cash equivalents and marketable securities of $232.4 million in comparison to $358.8 million as at December 31, 2022. In October 2023, it completed public offering and got an additional $472.0 million in the form of net cash proceeds.
Operating expenses came in at $98.5 million and $263.3 million for 3 and 9 months ended September 30, 2023 in comparison to $80.4 million and $208.3 million in the comparable prior-year periods.
The company launched a public offering, generating gross proceeds of ~$500 million. These proceeds are expected to be used for clinical and commercial activities for preparing potential launch of resmetirom in the US and for other general corporate purposes.
Healthcare-focused investment manager Baker Bros. Advisors held a significant stake in the company as of June 30, holding ~2.02 million shares. It added ~470,648 shares of the company to 13F portfolio during 2Q.
2. Viridian Therapeutics, Inc.
The company is a clinical-stage biopharmaceutical company, engaging in developing multiple product candidates to treat patients suffering from thyroid eye disease.
Cash, cash equivalents, and short-term investments of the company came in at $334.3 million as of June 30, 2023 in comparison to $373.9 million as at March 31, 2023. The company expects that its current cash, cash equivalents, and short-term investments should be enough to finance its operations into 2H25.
Research and development expenses of the company came in at $40.1 million during 2Q23 against $21.7 million for the same period of the last year.
The company is in the midst of a leadership change and it announced the $185 million private placement, which should cover expenses for several years.
3. Ultragenyx Pharmaceutical Inc.
The company is the US-based biopharmaceutical company which identifies, acquires, develops, and commercializes novel products for treatment of serious rare and ultra-rare diseases.
It has another bone disease-related treatment in the pipeline, setrusumab, which exhibited promising results regarding treatment of brittle bone disease.
The company is in a strong financial position because of its growing demand for commercial products, completion of recent offering, and its disciplined expense and portfolio management.
It saw total revenues of $98.1 million in 3Q23, representing 8% growth in comparison to 3Q22. 3Q23 Crysvita product sales, mainly in Latin America, came in at $19.2 million, exhibiting 46% growth in comparison to same period in 2022 and 14% growth over 2Q23. 3Q23 includes Crysvita royalty and non-cash royalty revenue in North America which came in at $50.2 million. This was impacted by the decrease in channel inventory.
Total operating expenses for 3Q23 came in at $243.1 million, which includes non-cash stock-based compensation of $34.9 million. In 2023, the company expects annual operating expenses to decrease compared to 2022, as it manages headcount and improves its operational leverage while executing on high-value programs.
In FY23, the company expects its total revenue in the range of $425 million to $450 million and Dojolvi revenue of between $65 million to $75 million. Net cash used in operations is expected to be ~$425 million in FY23.
Conclusion
While above are some of the top biotech stocks preferred by hedge funds, there are several other biotech stocks which are being favoured by the global hedge funds.
M&A activity in this sector is expected to pick up again, and top biotech stocks in the small-cap space will be attractive to bigger and renowned industry players having significant amount of cash balances on their balance sheets. Therefore, this can be the good time to invest in some of the top biotech stocks in the small-cap space having healthy financial profile.
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