Small-cap, clinical-stage biotech companies are only suitable for some investors. These stocks are often extremely volatile, because drug development is a slow and long process. Their stock prices can fluctuate dramatically due to news about clinical trials and regulatory approvals.
However, if the trials are successful, they could result in significant stock price gains. Biotech companies' innovative approach and focus on unmet medical needs make a compelling case for long-term investors willing to endure short-term volatility. Let's look at two standout stocks that Wall Street considers worthy of a "strong buy" rating.
#1. Avidity Biosciences
Avidity Biosciences (RNA) is a biopharmaceutical company that focuses on developing therapies for rare muscle disorders using its proprietary Antibody-Oligonucleotide Conjugates (AOCs) platform. Founded in 2012, Avidity is a relatively young company that has attracted significant attention due to its potential to transform the treatment landscape for genetic muscle diseases.
Valued at $4.2 billion, Avidity’s stock has surged an eye-catching 352.9% year-to-date, outperforming the S&P 500 Index's ($SPX) gain of 15.9%.
Avidity’s innovative approach is designed to treat diseases previously untreatable with RNA therapeutics. The company’s lead candidate, AOC 1001, is for the treatment of myotonic dystrophy type 1 (DM1), a genetic disorder that impairs muscle function. The company began enrolling candidates in the global Phase 3 trial in June.
Avidity's pipeline also includes AOC 1044, which targets Duchenne muscular dystrophy (DMD), and AOC 1020, which focuses on treating facioscapulohumeral muscular dystrophy (FSHD), among others. In the second quarter, the company announced that it had received positive preliminary data from the Phase 1/2 trial on the safety and tolerability of both AOC 1044 and AOC 1020 in enrolled patients.
Besides its pipeline for rare neuromuscular diseases, Avidity plans to launch a cardiology pipeline in the fourth quarter of this year.
The company currently has no product revenue. However, it generated $2 million in collaboration revenue in the second quarter from its research collaboration and license partnership with Bristol-Myers Squibb (BMY).
As a pre-revenue biotech company, Avidity is primarily funded by equity offerings, partnerships, and collaborations. Like many biotech companies, it's burning cash as it advances its clinical programs. At the end of the second quarter, it had $1.3 billion in cash, cash equivalents, and marketable securities.
The company's innovative approach to treating rare muscle disorders has the potential to generate significant returns, but it also carries the inherent risks associated with early-stage biotech companies. While positive clinical trial results have sparked interest, Avidity Biosciences remains a high-risk, high-reward investment opportunity.
What Does Wall Street Say About RNA Stock?
Recently, Bank of America Securities analyst Tazeen Ahmad reiterated a “buy” rating for RNA stock, with a price target of $51. Ahmad is impressed by Avidity's candidates' promising initial clinical trial results.
Overall, RNA stock is a “strong buy” on Wall Street. Out of 10 analysts in coverage, nine rate it a “strong buy,” and one rates it a “moderate buy.”
Despite RNA's outsized rally this year, its mean target price of $66.80 suggests that the stock has an upside potential of nearly 63% from current levels. Plus, its Street-high estimate stands at $96, which suggests the stock can rally as high as 134.2% over the next 12 months.
#2. Verona Pharma
Valued at $2.19 billion, Verona Pharma (VRNA) is a biopharmaceutical company that develops innovative therapies for the treatment of respiratory diseases. It is primarily concerned with treating COPD, a progressive and debilitating lung disease that affects millions of people worldwide. In June, the Food and Drug Administration (FDA) approved Ohtuvayre (ensifentrine), the company's lead candidate.
Verona’s stock has surged 36.8% YTD, outperforming the broader market's gain.
Ohtuvayre (ensifentrine), the company's lead product candidate, is a first-in-class inhibitor of both phosphodiesterase 3 (PDE3) and phosphodiesterase 4. Ensifentrine is intended to treat COPD and other respiratory conditions by combining bronchodilator and anti-inflammatory properties in one compound. In the second quarter, management announced that Ohtuvayre is now available in the United States for the maintenance treatment of COPD.
Furthermore, the company intends to launch a “Phase 2 clinical trial to assess the efficacy and safety of nebulized ensifentrine in patients with non-cystic fibrosis bronchiectasis (“NCFBE”)” in Q3 of this year.
At the end of Q2, cash and cash equivalents totaled $404.6 million. Verona also intends to raise $650 million through strategic financings. Management believes that this cash position will be sufficient to cover its operating expenses beyond 2026, including the commercial launch of Ohtuvayre in the U.S.
The company has yet to generate revenue, so the net loss in Q2 stood at $70.8 million. While the approval of ensifentrine is a positive sign, the company's future is dependent on the success of ensifentrine and other candidates in its pipeline.
Undoubtedly, ensifentrine has a unique dual mechanism of action. Yet it will compete with existing COPD treatments, such as long-acting bronchodilators, corticosteroids, and combination therapies. Ensifentrine's commercial success will be determined primarily by market adoption and pricing.
What Does Wall Street Say About VRNA Stock?
In August, Canaccord Genuity analyst Edward Nash maintained his “buy” rating for the stock with a price target of $37. Nash is optimistic about Ohtuvayre, and believes that the “company’s effective sales strategy and digital marketing efforts” may lead to the product's commercial success.
Overall, VRNA stock is a “strong buy” on Wall Street, based on the unanimous opinion of all six analysts in coverage. Its mean target price is $36, which implies an upside potential of 32.3% from current levels. Plus, its Street-high estimate stands at $38, which suggests the stock can rally as high as 39.6% over the next 12 months.
