Revolutionizing Healthcare and Economy: The Rapid Growth of Biotechnology
The biotechnology sector is expanding quickly due to rising demand for novel therapies, technological advances, and government assistance. Advances in fields like gene editing, sequencing, personalized medicine, and artificial intelligence are making new techniques possible, while the aging population and growing healthcare demands are driving a robust market for new treatments. According to a report by McKinsey & Company, venture capital firms made approximately $52 billion in global investments in therapeutic-focused biotech companies between 2019 and 2021. Two-thirds of this sum was given to platform-tech start-up companies.
Despite its growth, many biotech companies have faced challenges in turbulent markets, taking drastic measures such as cutting programs and implementing significant layoffs to conserve cash. While recent rate cuts could encourage the revival of scientific projects, analysts like Jared Holz note the difficulty of gauging their impact. Holz also highlighted a shift in market dynamics, observing that biotech's performance increasingly correlates with small-cap equities. If small-cap stocks trade well, biotech is likely to follow, though stagnation could occur if momentum fades. Notably, the idea of interest rates predicting biotech success is relatively new, emerging only after the pandemic, which reshaped the industry by driving substantial investment into therapeutic-focused companies.
With innovative treatments, biotech businesses are revolutionizing healthcare by tackling important unmet medical needs. Establishing the National Bioeconomy Board as a component of Biden's Investing in America agenda is a significant breakthrough. It seeks to maximize biotechnology's economic potential in the United States.
Furthermore, policy suggestions to expedite the approval process for biotechnology goods are being developed by the National Security Commission on Emerging Biotechnology. More academics will be able to use biotechnology for agricultural purposes if entry obstacles are reduced, which will benefit American farmers and increase food security. It is anticipated that these initiatives will open up new markets.
Pharmaceuticals as Defensive Investments and the 2024 Healthcare Market Outlook
This year (2024) started strongly for the biotechnology sector due to a rise in mergers and acquisitions as well as anticipations of falling interest rates. Therefore, estimates suggest that the worldwide biotechnology market might increase at a compound annual growth rate (CAGR) of around 14% from 2024 to 2033, reaching an astonishing $5.7 trillion. The market for agricultural biotechnology is also expected to develop at a 7.9% compound annual growth rate (CAGR) and reach $232 billion by 2032.
But even with the market's potential, investing in biotech companies still carries a number of serious dangers. Bankruptcy may result from failing to satisfy clinical trial endpoints or obtain adequate finance before a product launch. In the biotech industry, where drug development usually takes more than ten years and has an estimated failure rate of about 90%, the danger of failure is very substantial. Hence, biotech stocks are often considered “high-risk, high-reward” investments due to their upside potential coupled with significant risks
Our Methodology
In our methodology, we identified the top small-cap biotech stocks with significant growth potential, ranked according to their total hedge fund holdings as of Q2 2024. Our selection process began by filtering companies with a small market capitalization. Next, we reviewed analyst recommendations, focusing on stocks with strong bullish sentiment and high institutional ownership. Finally, we ranked these companies based on the number of hedge funds holding their shares as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A scientist in a lab coat researching data and researching new therapies.
89bio, Inc. (NASDAQ:ETNB) is a clinical-stage biopharmaceutical company focused on developing innovative therapies for liver and cardio-metabolic diseases. The company stands out with its focus on FGF21 analogs, especially BIO89-100, which has shown strong potential in clinical trials for NASH, demonstrating safety and significant reductions in liver fat and lipid markers. With a dual focus on NASH and SHTG, the company targets two large markets with one lead candidate. Its innovative use of glycoPEGylation technology enhances BIO89-100's efficacy and durability, positioning the company competitively in the biotech field.
As of September 30, 2024, 89bio, Inc. (NASDAQ:ETNB) reported $423.8 million in cash, cash equivalents, and marketable securities, ensuring robust funding for its clinical trials and operations. In Q3 2024, R&D expenses rose to $141.4 million (from $31.4 million in Q3 2023) due to an $81 million milestone payment to BiBo Biopharma, increased clinical and manufacturing costs, and higher personnel expenses. G&A expenses also increased to $10.5 million from $7.9 million. The net loss for Q3 2024 widened to $149.1 million, reflecting the company's investments in clinical progress, including pivotal Phase 3 trials for its lead candidate, pegozafermin, targeting MASH and SHTG. These trials aim to address significant unmet medical needs, with potential for accelerated approvals in the U.S. and Europe. Additionally, an amended credit facility with K2 HealthVentures provides access to up to $150 million, supporting 89bio, Inc. (NASDAQ:ETNB)'s growth.
As of Q3 2024, 30 hedge funds tracked by Insider Monkey held stakes in the stock, with RA Capital Management being the largest shareholder, holding $104.8 million in shares. Analysts have a Moderate Buy rating on the stock, with an average 12-month price target of $27.00, ranging from $12.00 to $34.00. This suggests a potential upside of 224.91% from the stock's current price of $8.31. ETNB ranks fifth on our list of the best biotech stocks.
Overall ETNB ranks 7th on our list of the best small-cap biotech stocks with massive potential according to hedge funds. While we acknowledge the potential of ETNB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ETNB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
