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3 Small-Cap Biotech Stocks to Watch Now

Todd Campbell, The Motley Fool

The potential to profit from revolutionary new treatments makes biotech one of the hottest industries for investors to target. However, 90% of drugs entering clinical trials wind up in laboratory dustbins, not on pharmacy shelves, making this industry fraught with peril. To reduce the risk of getting blindsided by disappointing trial results, investors need to pay particularly close attention when catalysts approach. For example, biotech investors should be watching Blueprint Medicines (NASDAQ: BPMC), Evolus (NASDAQ: EOLS), and Regenxbio (NASDAQ: RGNX) in the coming year because their shares could pop or drop based on trial data or commercial results for new products.

Precision 

To profit from surging interest in medicines that more precisely target disease based upon genetic makeup, Eli Lilly recently forked over $8 billion to acquire precision cancer-drug company Loxo Oncology. But Loxo isn't the only company researching next-generation approaches to tackling cancer. Blueprint Medicines is also at the forefront of this revolution. 

A man wearing a suit looking through binoculars.

Image source: Getty Images.

Blueprint's precision therapy that's closest to approval is avapritinib, a treatment targeting KIT and PDGFRA, two protein kinases that can be overly active in gastrointestinal stromal tumors (GIST) and systemic mastocytosis (SM). A registration-ready trial in advanced GIST is wrapping up soon, and if the data is solid, then a filing for approval in that indication should quickly follow. Additional studies that could allow avapritinib's use earlier in GIST and in SM are also progressing, with data expected next year. 

Avapritinib isn't Blueprint Medicines' only iron in the fire, either. It's also working on BLU-667, an oral drug that seeks to interfere with mutations to a gene called RET that can contribute to non-small-cell lung cancer, medullary thyroid cancer, and other solid-tumor cancers. Depending on trial data, Blueprint Medicines thinks it could file for Food and Drug Administration approval of BLU-667 in 2020.

If everything goes as planned, Blueprint hopes to have two FDA-approved drugs on the market and four regulatory decisions pending by the end of next year. There's no telling if that game plan will prompt a larger company to swoop in, like Eli Lilly did with Loxo, but I think it's possible. Blueprint's CEO was U.S. president of Algeta when Bayer bought it for $2.9 billion in 2013, and its chief medical officer was vice president for oncology research at Millennium Pharmaceuticals when it was bought for $9 billion by Takeda in 2008.

Taking on a Goliath

Botox, from Allergan (NYSE: AGN), is the most widely used treatment for erasing frown lines, but it will soon face tough competition from Evolus' Jeuveau following its FDA approval earlier this year. 

Jeuveau, a purified neurotoxin similar to Botox, could be a winner if soon-to-be-published data shows it matched Botox in efficacy and safety in a trial against each other. Management expects commercial sales to begin this quarter, and although net pricing is being kept confidential, it thinks Jeuveau will be cheaper than Botox after factoring in discounts.

The company's going to use samples to drive use initially, but commercial revenue should become increasingly more meaningful by the end of this year, particularly if European regulators also approve Jeuveau. An EU decision is expected this quarter.

Surely, Allergan isn't going to give in without a fight. But Evolus is modeling for Jeuveau to become the No. 2 treatment for frown lines within two years. If so, that could translate into hundreds of millions of dollars in sales. The aesthetic neurotoxin market is worth about $2.5 billion globally, and it's expected to grow to $3.5 billion in 2021. Currently, Botox's market share is 70%.

Evolus is guiding for $50 million to $55 million in annualized operating expenses in 2019, so a successful launch could mean it won't be long before this company turns a profit, making it a biotech worth watching.

DNA images inside test tubes.

IMAGE SOURCE: GETTY IMAGES.

A backdoor play on gene therapy

Regenxbio's patent portfolio could be on the cusp of producing significant revenue as gene therapies relying upon its technology make their way to market. 

It has developed adeno-associated viral (AAV) vectors used by drugmakers to deliver payloads to cells, and the first gene therapy to use its AAVs is up for FDA approval in May. There's no guarantee this gene therapy, Zolgensma, will get a green light, but Novartis (NYSE: NVS) was confident enough in its chances that it acquired Zolgensma's creator, AveXis, for $8.7 billion last year. 

If Zolgensma wins approval, Regenxbio will collect single-digit to low double-digit royalties, plus it could pocket up to $80 million in sales milestones.

It isn't entirely reliant on Novartis' success, either, because 14 companies are actively developing therapies using its technology, including Ultragenyx and Sarepta Therapeutics. Also, it's developing its own gene therapies. Following promising early-stage results in wet age-related macular degeneration, a multibillion-dollar indication, it plans to launch a larger phase 2b trial later this year. Additionally, it expects to announce interim data from its phase 1/2 clinical trial evaluating RGX-121 in mucopolysaccharidosis (MPS) type II in the second half of 2019. 

Because viral vectors are crucial to enabling gene therapies to work, and over 6,000 genetic disorders could be treated by gene therapy, investors ought to pay close attention to Regenxbio's progress. 

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Todd Campbell owns shares of Blueprint Medicines and Regenxbio. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.