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.
12 Best Small-Cap Biotech Stocks with Massive Potential According to Hedge Funds
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
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.
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%.
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.
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.
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.
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.
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.