Biotechnology has been out of favor with investors since the third quarter of 2021. Rising interest rates and a risk-averse environment conspired to drive investors into safe havens, and away from speculative biotech stocks.
With interest rates set to fall and the economy likely poised for a soft landing, however, biotech equities could regain their appeal in 2024. After all, this innovation-fueled segment of the market has a remarkable history of producing a surfeit of so-called "multibaggers" -- even more than the vaunted technology sector.
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Underscoring this point, the SPDR S&P Biotech ETF, which is widely considered a bellwether fund for small to mid-cap biotechs, boat raced both the benchmark S&P 500 and the Technology Select Sector SPDR Fund over the 10 years covering 2010 to 2020 (see graph below). With several major new drugs set to debut this year and the pace of innovation in multiple high-value areas like gene therapy quickening, history could be about to repeat itself.
XBI Total Return Level data by YCharts
Which biotech stocks might have what it takes to be among the first out of the gate in a new bull market for the industry? Wall Street analysts are extremely optimistic about Ocular Therapeutix(NASDAQ: OCUL) and Larimar Therapeutics(NASDAQ: LRMR). Are these two small-cap biotechs worth the risk? Let's dig deeper to find out.
Ocular Therapeutics
Ocular Therapeutics specializes in developing innovative therapies for eye diseases. Wall Street thinks the company's shares might run up by as much as 218% over the next 12 months. One of the main reasons for this optimistic outlook is the upcoming phase 3 trial of axpaxli, a drug candidate for wet age-related macular degeneration (wet AMD).
Wet AMD is a serious condition that can lead to blindness over time. It is a large and rapidly growing market, with drug sales for the condition forecast to reach almost $18 billion by 2030, according to a report by Grand View Research. To put this into perspective, Ocular's current market value is only $552 million. Wall Street's lofty price, in turn, appears to have a solid rationale behind it.
However, there are significant risks to consider. Wet AMD is a highly competitive indication, with several companies developing a variety of novel treatments and some of these therapies may turn out to be superior to axpaxli in terms of safety, effectiveness, convenience, and/or dosing. Moreover, there is no guarantee that axpaxli will succeed in this phase 3 trial.
That said, Ocular has an unusually robust pipeline for a company of its size. Its diverse pipeline could thus provide a safety net for shareholders in the event axpaxli misses the mark in this late-stage trial, as well as deliver additional value-creating opportunities for patient investors.
In all, this small-cap biotech arguably warrants a deeper dive by risk-tolerant investors on the hunt for promising growth stocks.
Larimar Therapeutics
Larimar Therapeutics is a small-cap biotech with enormous upside potential. Wall Street's consensus 12-month price target on the drugmaker implies an upside of 142%.
What's the thesis? Larimar expects to announce top-line data from a phase 2 trial of its Friedreich's ataxia (FA) candidate, CTI-1601 (nomlabofusp), in the first quarter of 2024.
FA is a rare and progressive genetic disease with limited treatment options. However, this serious neuromuscular disorder was the main impetus behind Biogen's $7.3 billion buyout of Reata Pharmaceuticals last year, underscoring the high-value nature of treatments for this inherited condition.
At the time of this writing, Larimar sports a market cap of $224 million. FA, on the other hand, is expected to grow into a $2 billion market by decade's end, according to Coherent Market Insights. So this stock could have quite a bit of room to run in the event nomlabofusp advances into a registrational trial.
What's the risk? Larimar is a one-drug candidate company, which is an extremely risky proposition. As such, this pre-revenue biotech stock, while promising, arguably only belongs in the portfolios of investors with an above-average appetite for risk.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends SPDR Series Trust-SPDR S&P Biotech ETF. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.
