Investing in Small-Cap Pharma Stocks – Yay or Nay?

By 2050, superbugs are predicted to become humanity’s biggest killer, ahead of cancer and cardiovascular disease. This prediction is made by the former director of the World Health Organisation, who claims the post-antibiotic era will put an end to modern medicine. 

The issue here is one of capitalism, or at the very least, market forces. Big pharma has been the ones to rely on when it comes to large investments into antibiotics. They saved more lives than pretty much anything else and revolutionized healthcare.

The reason superbugs are predicted to be the number one killer soon is because of antimicrobial resistance. It is essentially a fast-paced evolution. It where most bacteria die out, leaving only the resisted ones – the strongest survive, in a sense. This has been accelerated by human behavior through anti-bac soap, globalization, overprescribed antibiotics and not taking course properly.

In order to find new antibiotics that work is becoming increasingly difficult. You have to spend a lot of time and money on minor adjustments of current medication, or hope to stumble on something new. Both options are becoming less appealing to big pharma. The issue is that the short-term profit lies with higher volume medication. Many of us use painkillers and antidepressants on a daily/weekly basis for example. However, many people escape the use of antibiotics for decades, and even then, they’re only for a few weeks.

The reason why superbugs are such a threat then is because big pharma is having less interest in solving it. However, small-cap pharma is not giving up so easily. The Medicine Company was acquired by Melinta Therapeutics in 2017 in a $270m agreement, after a 12 month R&D stint on antibiotics and infectious diseases. It is as if this space has been left wide open for small pharma, from the vacuum that big pharma is leaving behind.

It is difficult for small pharma still. But one thing is for sure when there is a market failure, usually, government intervention is called to correct matters. It will surely not be long before subsidies and funding are increased for smaller companies to really make this a profitable endeavor.

Technology-driven small-cap pharma

With the developments of AI, science is somewhat becoming decentralized. The advancements in technology is a means to actually perform research more cheaply and get more results for your buck.

It is well known that big pharma has always relied on large funding for developing conventional therapeutics, as opposed to innovation. Innovation seems to be driven by SMEs within healthcare. This is perhaps because of their inherent advantage of being flexible. Peter Kiener, CEO of Zyngenia, claims “Small biotechs are usually very lean and can move more adroitly and efficiently, and at less cost, during the discovery and initial development of new drugs.“

“They are also more willing to take on risk and can explore new, unproven opportunities that have the potential to be game-changers if they are successful.” Other CEOs in the pharmaceutical industry have claimed bureaucracy holds back larger companies to a greater extent, which restricts creativity.

So, what small-cap pharma stocks to keep an eye on?

• Cara Therapeutics – NASDAQ:CARA – 1.1BN (Market Cap)
• ADMA biologics – NASDAQ: ADMA – 259,81M (Market Cap)
• Editas Medicine – NASDAQ:EDIT – 1.2BN (Market Cap)
• Genfit – NASDAQ:GNFT – 
• Coherus Biosciences – NASDAQ:CHRS – 1.4BN (Market Cap) 
• Sensus Healthcare – NASDAQ: SRTS – 106,08M (Market Cap) 

The danger of small-cap pharma

As an investor, it’s wise to only put a small % of your portfolio in small-cap pharma, at the most. We’ve assessed much of the advantages they have, but clearly there are some drawbacks too. They are cash-poor companies because of their lack of cash flow. You won’t be expecting dividends, but you’re in this for a possible soar in their price. Well, this might take a while. Even if their innovation and findings are top-notch, you can be looking at 10 to 15 years for the company to advance after a full FDA approval of their product/service. This is a grueling process with many phases.

As a result of being small-cap, they’re of course going to be volatile too. A single news article could send them swinging. Often the detrimental news usually comes from changes in regulation or law, something that can completely restrict their project halfway through. Of course, because they’re not a large multifaceted company, their risk isn’t diversified into other revenue streams.