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Are small-cap biotech stocks good investments now?

We look at the sector's success stories and assess what we can expect in the coming months

Genedrive PLC -

Lockdown has seen a long-overdue revival in the fortunes of and interest in the UK’s innovative small-cap life sciences companies with some eye-catching movements.

Genedrive PLC (LON:GDR), HemoGenyx Pharmaceuticals PLC (LON:HEMO), Omega Diagnostics Group PLC (LON:ODX) and OKYO Pharma Ltd (LON:OKYO) stand out with rises of between 600% and 1,100% over that 20-week period.

In fact, the 25 best performing shares in the sector since lockdown have booked triple-digit percentage gains or better.

Of course there’s a commonality: Eight of the top ten rocket stocks have some sort of COVID-19 ‘booster’, be that developing drugs that help mitigate the worst effects of illness, or tests that reveal whether people have or have not had the virus.

Rude health

A further indicator of a sector in rude health is access to capital, which has been excellent for our booming baby biotechs.

Avacta (LON:AVC), for example, raised £48mln in an oversubscribed share placing, while Tiziana Life Sciences (LON:TILS) has found US support for its latest cash call, which will bring in up to £44mln.

In short, there is a voracious demand for newly-minted stock in these top-performing companies.

The flurry of buying activity that has precipitated these prodigious gains seen during lockdown helps explain why the sector has proved so resilient in the year to date – a period of volatility, which has wiped 17.7% off the FTSE 100 so far in 2020 (or 34% at the market nadir) and 17.1% off the FTSE All-Share. In that period the AIM Healthcare Index has risen 6%.

Small-cap drug developers and med-tech companies have also outperformed the AIM All-Share, which has fallen 7% in the year-to-date and knocked into a cocked hat the performance of the larger-cap FTSE-All Share Health and World Health indices (+2% and +5%, respectively).

“We remain optimistic for the sector in 2020 given the expected inflexion points and superior growth,” said broker finnCap.

Investor questions

Many of those currently heading the leader board are at or just below historic highs. So, the questions being asked by investors are as follows:

• Is it worth buying these stocks at such exalted valuations?

• After Covid, what’s going to be next big driver of interest in the sector?

Rational analysis says a handful of the top 25 stocks screened are fully valued. But there are those where Covid is one of multiple opportunities.

Further to go?

Tiziana, for example, is sitting on a potential blockbuster, albeit very early stage, in the form of Foralumab, a fully-human anti-CD3 monoclonal antibody. And it has a delivery mechanism that could revolutionise the method by which antibody drugs are administered.

Not included in Tiziana’s current valuation is the diagnostics arm, which is being spun off into a separate entity.

The Wall Street broker HC Wainwright reckons the shares, currently changing hands for 175p, are worth at least £5 each. So, plenty to aim for there.

Also on the list of companies where a seemingly rich valuation probably still doesn’t do the company justice is Omega Diagnostics.

It has raised £11mln to ramp up production of its coronavirus tests. However, not fully recognised, according to analysts, are testing opportunities for food intolerance and diseases such as HIV.

There are other companies where, objectively, the recent revival of interest still fails to fully value the intellectual property being developed.

Licensing deals

Outside of Covid, value will be generated by licensing deals of the kind done by AstraZeneca with Redx Pharma PLC (LON:REDX) and Silence Therapeutics PLC (LON:SLN).

However, guessing where and when agreements of this ilk are likely to be signed is a little like playing investment ‘whack-a-mole’.

For Mark Brewer, director of healthcare research at growth company specialist finnCap, the next area ripe for growth is cell and gene therapy.

This area is exciting because the drugs under development won’t just treat the disease and its symptoms but will target the underlying causes, bestowing long-term benefits and curative potential.

Brewer reckons the products already deployed in the field represent the tip of the iceberg. The US Food & Drug Administration expects to be approving 10-20 cell and gene or cell therapy-based innovations a year by 2025.

As a result, a tsunami of funding is expected to wash through this promising new sub-sector developing next-gen medicines.

UK opportunities in gene and cell therapy

Leading the field here in the UK is an American company listed on AIM called Maxcyte (LON:MXCT), which helps large pharma re-engineer cells, but is also developing an in-house CAR-T therapy immunotherapy platform.

Also on the list are Horizon Discovery (LON:HZD), which had created a screening service based around the CRISPR gene editing technology; ReNeuron (LON:RENE), a stem cell specialist; Silence Therapeutics (LON:SLN), which is concentrating on gene silencing; and Avacta, where the focus is on synthetic antibody-like proteins.

“2020 has been a particularly strong year for many companies in the life sciences industry given their proximity to the fight against Covid-19, yet cell and gene therapy is also now on the precipice of revolutionising medicine – with many of those same companies at the forefront of such efforts,” says finnCap’s Brewer.

“If cell and gene therapy does become the backbone of treatment regimes in the future, then the companies involved are developing expertise in a critical sector of the life sciences industry, which should confer a competitive advantage as the sector matures further. Now is therefore a good time to invest in the future.”

Quick facts: Genedrive PLC

Price: 50 GBX

AIM:GDR
Market: AIM
Market Cap: £28.23 m
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