The Russell 2000 Index (RUT) is a small-cap stock market index that includes companies with market capitalizations ranging from $250 million to around $2 billion. While the RUT got caught up in the recent bout of broad-market volatility, many analysts see more upside in store for small-caps, particularly with Fed rate cuts on the docket for next month's meeting.
Three small-cap stocks with the potential to generate significant gains are Viking Therapeutics (VKTX), Arcutis Biotherapeutics (ARQT), and Longboard Pharmaceuticals (LBPH). Wall Street rates all three of these stocks a “strong buy,” and analysts expect them to soar between 54% and 110% over the next 12 months, on average.
Stocks of clinical-stage biotech companies often have the potential to skyrocket once a successful drug hits the market. So, while these forecasts might seem far-fetched now, they are not entirely impossible. Furthermore, biotech companies that treat rare diseases are good investments not just for short-term gains, but for the long run as well.
#1. Viking Therapeutics
Valued at $5.6 billion, Viking Therapeutics (VKTX) is a clinical-stage biopharmaceutical company that develops new therapies for metabolic and endocrine disorders.
Driven by positive clinical trial outcomes, Viking stock has gained 199.7% year-to-date, outperforming the S&P 500 Index‘s ($SPX) gain of 11.5%.
Its robust pipeline of clinical trials includes VK2809, a liver-selective thyroid hormone receptor beta agonist, for the treatment of NASH and hypercholesterolemia. Positive interim results from the Phase 2b VOYAGE study indicated promising efficacy and safety data.
Another notable program is VK0214, an investigational drug for X-linked adrenoleukodystrophy (X-ALD). VK0214 has demonstrated encouraging preclinical results and is currently undergoing Phase 1 clinical trials, with results expected in the second half of 2024.
The company has two more candidates, VK2735 Oral for obesity, in Phase 1 clinical trials and Phase 2 planned. Furthermore, the Phase 2 VENTURE study for VK2735 for obesity has recently concluded. The study demonstrated safety and tolerability, with approximately a “15% reduction in body weight from baseline following 13 weeks of dosing.”
As a clinical-stage biotech company, Viking Therapeutics does not yet generate significant revenue from product sales. Instead, the focus on clinical trials increased research and development (R&D) expenses to $47.9 million in the second quarter, resulting in a net loss of $22.3 million. At the end of the quarter, the company had $942 million in cash reserves (cash, cash equivalents, and short-term investments) to support ongoing and future clinical trials.
Overall, on Wall Street, Viking stock is a “strong buy,” based on the unanimous opinion of all 11 analysts in coverage. The average target price of $113.90 suggests the stock has an upside potential of 104.2% above current levels. However, its high target price of $138 implies a potential upside of 147.4% over the next 12 months.
#2. Arcutis Biotherapeutics
Valued at $1.02 billion, Arcutis Biotherapeutics (ARQT) develops and commercializes innovative dermatology treatments. Arcutis' lead product candidates address a variety of dermatological conditions, such as psoriasis, atopic dermatitis, seborrheic dermatitis, and vitiligo.
Arcutis stock has gained 176.7% YTD, outperforming the broader market.
The company’s lead candidate is ZORYVE (roflumilast) cream and foam. In 2022, Arcutis launched ZORYVE creams 0.3% for the treatment of plaque psoriasis. In January this year, the company launched ZORYVE foam 0.3% for the treatment of seborrheic dermatitis. In the first quarter of 2024, net product revenue of $21.6 million included $15 million from ZORYVE cream 0.3% and $6.5 million from ZORYVE foam 0.3%. Other revenue of $28 million included collaboration and licensing revenue.
The roflumilast cream is a potent, selective phosphodiesterase-4 (PDE4) inhibitor being developed for the treatment of plaque psoriasis and atopic dermatitis. In July, the U.S. Food and Drug Administration (FDA) approved “ZORYVE (roflumilast) cream 0.15% for the treatment of Atopic Dermatitis (AD) in adults and children down to 6 years of age.” The company also launched the product at the end of July. Arcutis also has two more candidates in its pipeline: ARQ-255 for alopecia areata and ARQ-234 for atopic dermatitis.
Arcutis has a strong cash position, with over $404.5 million in cash, cash equivalents, restricted cash, and marketable securities. This robust cash reserve will help the company with continued research and development (R&D) activities, as well as potential commercialization efforts. However, like many biotech firms in the developmental stage, Arcutis is not yet profitable, with significant expenses related to R&D and clinical trials, which resulted in a net loss of $35.4 million.
Overall, on Wall Street, Arcutis stock is a “strong buy.” Out of the six analysts covering ARQT stock, four rate it a “strong buy,” one rates it a “moderate buy,” and one recommends a “hold.”
The average target price of $18.83 suggests the stock has an upside potential of 110.6% above current levels. However, its high target price of $26 implies a potential upside of 190.8% over the next 12 months.
#3. Longboard Pharmaceuticals
Longboard Pharmaceuticals (LBPH), which is valued at $1.35 billion, was founded following its 2020 spin-off from Arena Pharmaceuticals. It is a clinical-stage biopharmaceutical company that specializes in developing treatments for rare neurological diseases.
Longboard’s stock has gained 513.4% YTD, crushing the broader market's gain.
The company's lead candidate, Bexicaserin (LP352), has shown promising safety and efficacy data in early-stage trials. In the Phase 1b/2a PACIFIC Study, LP352 showed “favorable safety and tolerability and has received the “Breakthrough Therapy designation (BTD) for the treatment of seizures associated with Developmental and Epileptic Encephalopathies (DEEs) for patients two years of age or older.” The company plans to launch a global Phase 3 trial by the end of the year.
In addition to LP352, Longboard is developing LP659, a selective sphingosine-1-phosphate receptor modulator for CNS disorders.
Longboard hasn’t generated any significant revenue, as its products are still in the development phase. Its cash position at the end of the second quarter stood at $304.9 million, which it believes will cover current pipeline development until 2027.
If LP352 continues to produce positive results, Longboard may attract interest from larger players looking to expand their CNS portfolios. The global epilepsy market is rapidly expanding. Developing effective treatments for DEE presents a lucrative opportunity for Longboard.
Overall, on Wall Street, Longboard stock is a “strong buy.” All eight analysts covering LBPH stock, rate it a “strong buy.”
The average target price of $55.38 suggests the stock has an upside potential of 54.4% above current levels. However, its high target price of $90 implies a potential upside of 143.3% over the next 12 months.
