Forget Big Pharma: These Little Stocks Offer Far Richer Investing Opportunities

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Large pharma stocks tend to be favorites in the investing community, as their huge size and diverse product portfolio offer investors safety when the market goes crazy. However, their huge size hinders them from giving investors big returns in a short amount of time. For investors who are willing to take on a little bit more risk in exchange for the chance to profit big, there are plenty of small pharma companies that may be worthy of consideration.

We asked our team of Motley Fool contributors to highlight a small pharma stock that they believe should be on a healthcare-focused investor's radar right now. Read on to judge for yourself if you agree with their suggestions.

: Orexigen Therapeutics is a promising small-cap biopharma that's fallen on hard times recently because of self-inflicted wounds. That said, I think the market's outlook has become overly pessimistic, perhaps making this stock a good contrarian buy.

Per its revised marketing agreement with Takeda Pharmaceuticals in North America for the anti-obesity pill Contrave/Mysimba, Orexigen is now on the hook for the first $210 million of a new cardiovascular outcomes trial mandated by the FDA. This new trial and amended marketing agreement only became necessary after Orexigen's management disclosed interim data for the drug that was never supposed to become public, according to the FDA, Takeda, and the study's principal investigator. Hence, the self-inflected wound part of the story.

On the bright side, Contrave's prescriptions have been picking up steam in a big way, growing a whopping 47% sequentially from first to the second quarter of 2015. As a result, Contrave is now the market-share leader among weight-loss medicines, with 172,050 prescriptions filled in the second quarter, according to IMS Health .

With the drug's European launch expected to occur soon, the Street thinks Orexigen's 2016 revenues could double relative to 2015's final figures. If that estimate holds true, that means Orexigen's stock is currently trading at a mere 3.5 times its 2016 revenue -- a reasonable valuation for a company with an approved drug on the market.

While it's true that Orexigen probably won't break out of the red anytime soon because of the expense of this upcoming cardiovascular outcomes trial, I think the market should value the company's stellar revenue growth more highly than it is.

After all, the obesity-drug market as a whole is growing at a nice clip, albeit much slower than originally anticipated. And Contrave's double-digit sales growth should be sustainable for a long time, given the pandemic nature of obesity and the limited number of experimental treatments in the clinic right now.

: Politicians, patients, payers, and doctors are right to be up in arms over the practice of acquiring long-used drugs solely to rebrand them with sky-high drug prices. But investors might be wrong to paint a broad brushstroke across biopharma. In fact, the recent 37% sell-off in Depomed since mid-September could be creating an opportunity for investors to buy. Here's why.

Although Depomed engages in buying approved drugs -- four of its five marketed therapies came via acquisitions -- its pricing scheme is arguably quite different from that of other companies in the news.

While competitors are buying existing therapies for uncommon treatments that dominate their indication, thus allowing for sky-high price tags, Depomed takes a different approach.

For example, Depomed's opioid pain killer Nucynta, which it bought from Johnson & Johnson earlier this year, only has low-single-digit market share, and given that Depomed's post-acquisition price increase only brought Nucynta's cost in line with market-share leader Oxycontin's $18.40-per-day price tag, it would seem Depomed is more focused on boosting prescription volume than on gouging payers.

That thinking is backed up by Depomed's massive spending on marketing, which appears to be paying off, given that Nucynta's scripts are up 15.5% year over year as of mid-September.

Because Depomed is profitable, is trading at just 12 times forward EPS estimates, and is currently fending off a hostile takeover bid by a competitor, it seems to me there's a better chance of reward than risk in this one.

: While most investors tend to shy away from small-cap pharmaceutical companies, as they tend to be years away from generating their first dollar of revenue, I've got my eye on one that's been generating revenue for years and is on the cusp of reaching profitability.

IGI Laboratories is a specialty generic pharmaceutical manufacturer that creates generic version of specialty pharmaceutical products. The company finds drugs that are losing patent protection in the topical, injectable, complex, and ophthalmic markets, and then creates a generic version and sells it through pharmacies at a discount.

IGI currently has only seven products on the market in 12 different formats that are producing revenue, but that number is poised to grow quickly. The company has a pipeline of 30 products that are already pending FDA approval, and as they hit the market, IGI's revenue should continue to soar.

The company is still losing money, but it should be able to reach operating breakeven in the fourth quarter. If it can get there, it should help to make an investment in this company less risky, which I think that market will reward with a higher valuation.

IGI is still quite a tiny pharmaceutical company, as its market cap is currently under $350 million, so if the company successfully executes on its strategy, it could provide investors with terrific returns from here. Given the recent selloff in all healthcare-related stocks, now might be a good time to give this little pharma stock a look.

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The article Forget Big Pharma: These Little Stocks Offer Far Richer Investing Opportunities originally appeared on

Brian Feroldi has no position in any stocks mentioned. George Budwell owns shares of Johnson & Johnson. Todd Campbell owns shares of DepoMed,. The Motley Fool recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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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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