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2017 Small-Cap Biotech Watchlist: Takeaways for Investors

Submitted byThe Life Sciences Reportas part of ourcontributorsprogram

2017 Small-Cap Biotech Watchlist: Takeaways for Investors

From: The Life Sciences Report 01/18/2017

Why should investors keep an eye on these twenty small-cap biotechs in 2017? The analysts who made the selections for The Life Sciences Report's 2017 Small-Cap Biotech Watchlist laid out their rationales at the Watchlist's launch at the Biotech Showcase in San Francisco on Jan. 11.


In a panel discussion moderated by Maxim Group's senior managing director and the head of healthcare research Jason Kolbert, Raghuram "Ram" Selvaraju of Rodman & Renshaw; George Zavoico, senior equity analyst at JonesTrading Institutional Services; and Mike King, managing director and senior biotechnology analyst at JMP Securities, detailed their investment theses for the companies that made the cut.

King chose nine companies for the list, including OncoMed Pharmaceuticals Inc. (OMED:NASDAQ) , a company "we've had a long-term passion for." He considers OncoMed a "leader in the cancer stem cell space," with a number of clinical assets including a handful that are proprietary, and many partnered with larger-cap pharmas and biotechs. Among the candidates slated for either clinical trials or data readouts in 2017 is demcizumab, in pancreatic cancer. "We think it will be a key catalyst for the shares," King said. Other assets include tarextumab, for a small cell lung cancer; DLL4/VEG4, also in non-small cell lung cancer; and "a new asset that was previously known as I/O#2. . .a very highly validated immuno-oncology target called TIGIT," in development in partnership with Celgene Corp. (CELG:NASDAQ).

King called Syndax Pharmaceuticals Inc. (SNDX:NASDAQ) "a hybrid story. " The company is a player in the immuno-oncology space as well as in the "broader" cancer world with a drug called entinostat, which is in Phase 3 in metastatic breast cancer. Readouts on overall survival aren't expected until 2019, but King is "optimistic about Syndax's chances for success in the Phase 3 trial." The company is also in collaborations with major pharmas in the "immune checkpoint space," with data expected to "roll out over the course of 2017."

Syros Pharmaceuticals (SYRS:NASDAQ) is an early-stage company, with a ~$250M market cap, that King considers a leader in gene regulation, with a concept called super-enhancers. The company both develops its "own internal candidates to some of the highly validated targets," as well as repurposes assets that may have been abandoned for indications like blood disorders. Syros might be "a quiet story the first half of 2017, but I think in the second half of 2017, we'll start to see some fireworks based on the data that will read out through key assets, SY-1365 and SY-1425."

Companies that King did not discuss at the Showcase, but that he also placed on the Watchlist, include Pieris Pharmaceuticals Inc. (PIRS:NASDAQ), which has a proprietary biologics platform in the field of anticalins; WAVE Life Sciences Ltd. (WVE:NASDAQ), which is focused on preclinical development of a platform of therapies targeting Duchenne muscular dystrophy, Huntington's disease and inflammatory bowel disease; Blueprint Medicines Corp. (BPMC:NASDAQ), which is in clinical trials and discovery phase development of kinase inhibitors targeting liver cancer and gastrointestinal stromal tumors; Epizyme Inc. (EPZM:NASDAQ), focused on epigenetics and developing tazemetostat for the treatment of non-Hodgkin's lymphoma and mesothelioma; Karyopharm Therapeutics Inc. (KPTI:NASDAQ), which is in clinical trials with two compounds targeting blood cancers and solid tumors; and Loxo Oncology Inc. (LOXO:NASDAQ), targeting the inhibition of genetic drivers in various cancers.

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Ram Selvaraju began with his investment thesis for Abeona Therapeutics Inc. (ABEO:NASDAQ), which was also placed on the Watchlist by panelist George Zavoico. Abeona is attractive due to its "diversification and its presence in the gene therapy and gene editing fields," Selvaraju said. The company is developing programs for ultra-rare orphan diseases, and also has "a nascent CRISPR program." These focuses position the company "in a very different kind of therapeutic paradigm," the analyst said, where "we're really talking about potentially definitive cures with a very limited treatment course or even only a single shot treatment course."

Selvaraju also showcased BioSpecifics Technologies Corp. (BSTC:NASDAQ). The Rodman & Renshaw price target of $63 per share is "starting to look very conservative these days" given the company's recent announcement of positive Phase 2b data in cellulite with its lead candidate, injectable collagenase. The compound is "being commercialized with Endo Pharmaceuticals Inc. (ENDP:NASDAQ) for a couple of rare disease conditions-Dupuytren's contracture and Peyronie's disease. . .but we think this cellulite opportunity dwarfs all of these by a considerable margin." Selvaraju likened the treatment to "Botox for non-facial applications. . .we colloquially refer to it as a chemical iron."

Selvaraju also highlighted Sorrento Therapeutics Inc. (SRNE:NASDAQ), which "is doing some of the most exciting work we see in the antibody space, particularly with its collaboration with the City of Hope." Sorrento is developing candidates "that can go inside the cell and chase the target there wherever it may hide," which has "significant ramifications for overcoming cancer cell resistance to some of the most widely used anti-cancer targeted therapy monoclonal antibodies," Selvaraju said. Sorrento is also in the immunotherapy space, "primarily focused on the development of an allogeneic solution to a cell-based immunotherapy problem." The company, he believes, "is going to provide a rich vein of value-driving catalysts in the year ahead."

Another company on Selvaraju's list is Stemline Therapeutics Inc. (STML:NASDAQ), which recently announced "the exciting news that it has an approval pathway mapped out with the FDA for its lead drug, SL-401, which is targeting a rare hematological disease called blastic plasmacytoid dendritic cell neoplasm (BPDCN)." Selvaraju expects the company "to be able to file for approval of the drug sometime around the middle of this year, potentially with the accelerated pathway for orphan disease-targeting drugs, and potentially start marketing it toward the end of this year." The company also "has a follow-on molecule, SL-501, which has generated very interesting proof-of-concept preclinical data in chronic myelogenous leukemia," Selvaraju added.

Selvaraju has been following last company on his list, Synergy Pharmaceuticals Inc. (SGYP:NASDAQ), since 2011, and noted that it "was deeply gratifying to me to see at the end of last year the company deliver in spades with two positive, well-controlled, large, robustly designed Phase 3 trials in constipation-predominant irritable bowel syndrome." The company also has generated positive data in Phase 3 in chronic idiopathic constipation, and Selvaraju noted that these are "massive market opportunities that afflict tens of millions of people, and historically have been very underserved by drug development efforts across the spectrum." The company's lead candidate, plecanatide, arguably has a "superior safety profile" compared to competitors, the analyst asserted. He also noted "a very key catalyst coming up in the next couple of weeks because of plecanatide's Prescription Drug User Fee Act (PDUFA) date with the FDA of Jan. 29. We remain highly confident that plecanatide will receive a timely approval, and that will clearly mark a landmark achievement for the company."

The Approval Process in Action Infographic

George Zavoico presented his Watchlist companies from low to high market cap, and also chose to highlight companies "off the radar in the sense that they're not in the typical immuno-oncology, chimeric antigen receptor T-cell (CAR-T) hotspot."

Catalyst Biosciences Inc. (CBIO:NASDAQ) has a sub-$10M market cap, and is focused on changing the treatment paradigm in the hemophilia space from "treating acute bleeding episodes to preventing bleeding episodes altogether," Zavoico said. The company plans to enter into clinical trials with its products this year. If the proteins in development, which can be administered subcutaneously, "work as well as we would like to see them work," Zavoico noted, hemophilia patients "won't bleed anymore," and can enjoy a much more "normal quality of life."

Threshold Pharmaceuticals Inc. (THLD:NASDAQ) is developing a hypoxia-activated prodrug to treat cancer, Zavoico said. Because "most tumors have a hypoxic region that is resistant to most chemotherapy, stem cells, cancer stem cells and other cells that aren't hit by the chemotherapy can emerge after the chemotherapy regimen, repopulate the tumor zone and bring about recurrence and relapse," the analyst explained. Threshold's lead candidate, evofosfamide, is "sort of in limbo" after barely missing statistical significance in a pancreatic cancer trial, but because the drug did have a significant result in a subset of Japanese patients, the company is working toward "a registration path for evofosfamide in Japan," which could happen in 2017. Threshold is also expected to generate preclinical results, and possibly a Phase 1 trial, of evofosfamide in combination with checkpoint inhibitors.

Next up is Actinium Pharmaceuticals Inc. (ATNM:NYSE.MKT), which is developing two radiopharmaceutical products. Zavoico said. Actimab-A is an antibody radiopharmaceutical conjugate targeting newly diagnosed acute myeloid leukemia (AML) in elderly patients, and Iomab-B is in a Phase 3 trial for relapsed, refractory AML for patients who are about to undergo hematopoietic stem cell transplant, and for elderly patients who cannot tolerate any other therapy.

Zavoico also added ArQule Inc. (ARQL:NASDAQ) to the Watchlist. ArQule "had a Phase 3 failure in lung cancer with its lead compound called tivantinib, a c-MET inhibitor, but learned from that trial that the patients should be selected for high c-MET expression." The company has since initiated "a hepatocellular carcinoma trial with that in mind," which is expected to read out in Q1/17. The company has additional pipeline candidates, including an Akt inhibitor for multiple indications including cancer, sickle cell, and rare diseases, a fibroblast growth factor receptor (FGFR) inhibitor for cholangiocarcinoma biliary duct cancer, "which is progressing very well," and a Bruton's tyrosine kinase ( BTK ) inhibitor. ArQule has "gone from basically a one-product company to an advanced product company with a much richer, deeper pipeline than it had even a year or two ago," Zavoico noted.

Asterias Biotherapeutics Inc. (AST:NYSE.MKT) is a regenerative medicine company focused "on an indication that it believes it can get to market fast with, making a big impact," Zavoico said. This product, OPC1, an oligodendrocyte progenitor cell, targets spinal cord injury; the company saw "a much better recovery than would have been seen spontaneously" in a quadriplegic patient, Zavoico said, noting the patient spoke on the company's earnings call that he had "recovered to the point where he could type text." While the trial is small, Zavoico believes that "as more patients progress and are treated, we should see data from this throughout the year." The company also has two dendritic stem cell-derived vaccine products, VAC1 and VAC2, for the treatment of various cancers, which will progress into clinical trials in 2017.

Zavoico reiterated Selvaraju's endorsement of Abeona Therapeutics, detailing the promise of its programs in rare central nervous system ( CNS ) diseases and noting that the company has "leveraged a novel adenoassociated virus that crosses the blood-brain barrier so you can deliver the missing gene directly to the CNS. It's had some early results, again an open label trial, showing some potentially meaningful benefit."

Finally, Zavoico discussed Edge Therapeutics Inc. (EDGE:NASDAQ), which is targeting "an unmet clinical need in subarachnoid hemorrhage." Its lead candidate, nimodipine, has been used as "standard of care for patients who had a subarachnoid hemorrhage orally," but Edge has "packaged it into a controlled-release polymer and infuses it directly into the brain" via the drain installed to treat the hemorrhage. The company is in a Phase 3 trial, and Zavoico said Edge "sees a doubling in the number of patients who recover on disability scales."

The panelists ended with a discussion of the state of the small-cap biotech market, the outlook for 2017, and the status of products and platforms currently in development.

They agreed that 2016 was a difficult year for biotech, particularly for companies focused in the CAR-T and gene therapy space. For new therapies like CAR-T and CRISPR, King anticipates the technologies to follow a longer-term path-ten years or more-"before we see any real proof-of-concept. . .to say that something that's a new approach, a novel approach, within two to three years is going to suddenly be a game changer I think was a bit naïve."

Going forward, the analysts noted that larger pharmas and biotechs continue to seek out "bolt-on" additions to their pipelines, which opens the doors to mergers and acquisitions for micro-, small-, and "smid"-cap companies. "In this smidcap space, you're on firmer ground because there are a number of companies in that space that are prey for big pharma and big biotech. And the needs of the big pharma and the big biotech vary a lot," Selvaraju said.

The wildcard factor moving forward is uncertainty about how the Trump Administration will approach such issues as drug pricing. "Even though the presidential election cycle has come to an end and there's been resolution of uncertainty on that front, we now have an administration which is not going to be entirely predictable in terms of its treatment of the drug pricing issue," Selvaraju observed.

"We are, however, encouraged by the recent passage of the 21st Century Cures Act," the analyst added. "One of the things that we've said previously is that every time a landmark piece of legislation like this is enacted, it turns out to be both a near-term and a long-term boom for the biopharma industry."

Michael G. King a managing director and senior biotechnology analyst at JMP Securities. King comes to JMP from Rodman & Renshaw LLC, where he was managing director and senior biotechnology analyst. He has more than 17 years of experience as a leading biotechnology equity research analyst, consistently ranking at the top of Institutional Investor magazine's annual sellside research survey, in addition to being named that publication's "Home Run Hitter" in 2000. King also served as senior vice president of corporate development and communication at ZIOPHARM Oncology (ZIOP:NASDAQ). Prior to joining ZIOPHARM, King was a managing director and senior biotechnology analyst at Wedbush Securities. He holds a bachelor's degree in finance from Baruch College.

Raghuram "Ram" Selvaraju'sprofessional career started at the Geneva-based biotech firm Serono in 2000, where he discovered the first novel protein candidate developed entirely within the company. He subsequently became the youngest recipient of the company's Inventorship Award for Exceptional Innovation and Creativity. Selvaraju started in the securities industry with Rodman & Renshaw as a biotechnology equity research analyst. He was the top-ranked (#1) biotech analyst in The Wall Street Journal's "Best on the Street" survey (2006) and went on to become head of healthcare equity research at Hapoalim Securities, the New York-based broker/dealer subsidiary of Bank Hapoalim B. M., Israel's largest financial services group. While at Hapoalim, Selvaraju was regularly featured in The Wall Street Journal, Barron's, BioWorld Today , and Reuters/AP. He was also a regular guest on the Bloomberg TV program "Taking Stock," appeared with Bloomberg TV's on-air correspondents Betty Liu and Gigi Stone and was a guest on CNBC's "Street Signs with Herb Greenberg."

Dr. George Zavoico, senior equity analyst at JonesTrading Institutional Services LLC, has more than 10 years of experience as a life sciences equity analyst writing research on publicly traded equities. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical, and molecular diagnostics companies. Previously, Zavoico was a senior equity research analyst in the healthcare sector at MLV & Co., and an equity analyst at Cantor Fitzgerald and Westport Capital Markets. Prior to becoming an equity analyst, Zavoico established his own consulting company serving the biotech and pharmaceutical industries, providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals Inc. and T Cell Sciences Inc. (now Celldex Therapeutics Inc.). Zavoico has a bachelor's degree in biology from St. Lawrence University and a Ph.D. in physiology from the University of Virginia. He held post-doctoral fellowships at the University of Connecticut School of Medicine and Harvard Medical School/Brigham & Women's Hospital. He has published more than 30 papers in peer-reviewed journals and has coauthored four book chapters. He received The Financial Times/Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector.

Jason Kolbert is a senior managing director with the Maxim Group, and the head of healthcare research as well as a covering analyst. Kolbert's career began as a chemist in the pharmaceutical industry, and evolved into a product and marketing manager with Schering-Plough in Japan. Upon returning from Japan, he joined Salomon Smith Barney as a research associate, which evolved into an 18-year career on Wall Street as a ranked biotechnology analyst. As the head of healthcare at Maxim, Kolbert manages the healthcare effort to maintain a balance of large, capitalized, relevant institutional coverage combined with the next generation of small, capitalized, emerging companies that will influence the sector. His focus is across several therapeutic areas, with an emphasis in antiviral medicine, regenerative medicine, oncology and immunology (cell therapy). Kolbert is noted for being among the first analysts to focus on the changing landscape for Hepatitis C therapy. Today Kolbert is making the same call for stem cell therapy, identifying the sector as having the potential to alter current treatment paradigms. Kolbert spent seven years at Citi Group as a traditional sellside analyst, followed by seven years on the buy side as a portfolio manager with the Susquehanna International Group. Kolbert recently returned to his analyst role after spending a year as the head of business development for a public cell therapy company. At Maxim, Kolbert and his colleagues oversee a team responsible for covering 70 companies.

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1) Tracy Salcedo compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.

2) The following companies mentioned are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.

3) Comments and opinions expressed are those of the specific analysts and not of Streetwise Reports or its officers.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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