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5 Small Drug Stocks to Buy From a Recovering Industry

The Zacks Medical-Drugs industry recovered from 2023 lows in early 2024 amid a slew of takeover deals. However, it slowed down thereafter, mostly due to macroeconomic pressure. Concerns around the economy and inflation, regular pipeline setbacks, uncertainty about the impact of Medicare drug price negotiations and the Federal Trade Commission’s scrutiny of M&A deals are some of the headwinds faced by drug/biotech companies. However, the industry has shown signs of a comeback in May. M&A activity remains strong in the sector. In addition, innovation is likely to drive growth, with key spaces like weight loss/obesity and Alzheimer’s disease drugs attracting attention.

The fundamentals of the industry remain strong as the need for medicines never goes away. These positive factors should keep driving stocks like Heron Therapeutics HRTX, Bioventus BVS, Aquestive Therapeutics AQST, Acrivon Therapeutics ACRV and Cardiol Therapeutics CRDL.

Industry Description

The Zacks Medical-Drugs industry comprises small and some medium-sized drug companies that make medicines for both human and veterinary use. We have a separate industry outlook discussion on big drugmakers. Small drugmakers have a limited portfolio of marketed drugs or no commercial-stage drugs at all. Some drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases, their larger counterparts — are the main sources of revenues. These companies need ample free cash flow to fund their R&D activities.

Factors Shaping the Future of the Medical-Drugs Industry

Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.

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Strong Collaboration Partners: These companies regularly seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal. M&A deals are in full swing in the sector, signaling growth.

Investment in Technology for Innovation: For these smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires adopting innovative business models, investing in new technologies and increasing investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through the meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the key priorities for drug companies. Artificial intelligence and machine learning techniques are being used for the rapid advancement of drug discovery and target identification processes.

Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share price in the future.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #90, which places it in the top 36% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present you with a few top-ranked stocks to capitalize on the thriving prospects of the small and medium-sized drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.

Industry Lags S&P 500 and Sector

The Zacks Medical-Drugs industry is a huge 184-stock group within the broader Medical sector. The industry has underperformed the S&P 500 as well as the Zacks Medical sector in the past year.

Stocks in this industry have collectively declined 5.4% in the past year against the Zacks S&P 500 composite’s rise of 27.9% and the Zacks Medical sector’s increase of 7.5% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12 months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 2.05, compared with the S&P 500’s 4.07 and the Zacks Medical sector's 3.50.

Over the last five years, the industry has traded as high as 5.05X, as low as 1.71X, and at the median of 2.58X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

5 Drug Stocks to Bet On

Bioventus: Durham, NC-based Bioventus makes minimally invasive treatments that engage and enhance the body’s natural healing process. Its three segments are Pain Treatments, Restorative Therapies and Surgical Solutions. It is seeing double-digit revenue growth in both Pain Treatments and Surgical Solutions, which has improved its profitability. The company expects the positive momentum to continue in the remainder of 2024. The company raised its financial guidance at the first quarter earnings release based on accelerated momentum in its business and increased expectations

Bioventus’ stock is up 20.1% this year so far. The consensus estimate for 2024 earnings has risen from 16 cents per share to 27 cents per share over the past 60 days. The company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. 

 

Price and Consensus: BVS

Aquestive Therapeutics: Warren, NJ-based Aquestive Therapeutics' key pipeline candidate is Anaphylm (epinephrine) Sublingual Film, which it is developing as a non-invasive oral epinephrine product candidate. It can offer greater convenience to autoinjectors such as EpiPen and Auvi-Q for the emergency treatment of severe allergic reactions, including anaphylaxis. In March, the company announced top-line data from the pivotal phase III pharmacokinetic (PK) study for Anaphylm. The study achieved the primary and secondary endpoints. The data showed that Anaphylm was non-inferior to the leading autoinjectors immediately following administration. The company plans to file an NDA for Anaphylm to treat severe allergies by the end of 2024, subject to a positive pre-NDA meeting.

In April, the FDA granted approval and U.S. market access to Aquestive's Libervant (diazepam) Buccal Film for the acute treatment of intermittent, stereotypic episodes of frequent seizure activity for kids aged 2-5 who have epilepsy. Libervant is not expected to face much competition as Diastat (diazepam) Rectal Gel is the only FDA-approved treatment for this patient group for the disease. Aquestive believes there is significant demand for an oral product in this space.

Aquestive earns royalty revenues from its five out-licensed marketed products that it supplies under license deals with partners. Aquestive is the exclusive manufacturer of these licensed products. Its revenues from these products are increasing due to strong demand trends.

Aquestive Therapeutics’ stock has risen 51.5% year to date. The consensus estimate for 2024 loss has risen from 38 cents per share to 42 cents per share over the past 60 days. The company has a Zacks Rank #2 (Buy).

 

Price and Consensus: AQST

 

Cardiol Therapeutics: This Canada-based company is making rapid progress with the development of CardiolRx, its lead drug candidate for the treatment of inflammation and fibrosis in heart disease. CardiolRx is being evaluated in phase II studies in two diseases affecting the heart — recurrent pericarditis and acute myocarditis. Data presented at the American Heart Association demonstrated CardiolRx’s ability to confer cardioprotective effects in a model of recurrent pericarditis. Important clinical updates are expected this year, which could be catalysts for the stock.

Top-line data from the phase II MAvERIC-Pilot study evaluating CardiolRx in recurrent pericarditis is expected in the fourth quarter of 2024.  Patient enrollment in the phase II ARCHER study in acute myocarditis is expected to be completed in the third quarter of 2024, well ahead of the original timeline. The company also has a strong cash position, which it believes is sufficient to fund operations into 2026.

The stock of Cardiol Therapeutics has risen 163.3% so far this year. The consensus estimate for 2024 loss has narrowed from 32 cents per share to 26 cents per share over the past 60 days. The company has a Zacks Rank #2.

Price and Consensus: CRDL

Heron Therapeutics: Redwood City, CA-based Heron Therapeutics’ key marketed drug is Zynrelef, a non-opioid dual-acting local anesthetic for post-operative pain for a wide range of surgical procedures. In January, the FDA approved an expansion to the Zynrelef label to include additional orthopedic and soft tissue procedures, which will now cover an estimated 13 million procedures annually, an increase of 86% over the prior indicated procedures.  In phase III studies, Zynrelef demonstrated superiority to bupivacaine solution, the current standard of care, with lower pain scores, fewer patients experiencing severe pain and lower opioid consumption. In January, the company also announced a five-year distributor partnership with CrossLink Life Sciences to expand promotional efforts for Zynrelef. Its other commercial products, Aponvie, Cinvanti and Sustol, are also generating decent sales. Overall, the company’s revenues and margins are growing.

The stock of Heron Therapeutics has risen 103.5% so far this year. The consensus estimate for 2024 loss has narrowed from 22 cents per share to 10 cents per share over the past 60 days. The company has a Zacks Rank #2.

Price and Consensus: HRTX

Acrivon Therapeutics: Watertown, MA-based Acrivon Therapeutics is a precision oncology company that has seen significant progress across its proprietary AP3 platform in 2024. Its lead pipeline candidate, ACR-368/prexasertib, a CHK1/2 inhibitor, is being developed in phase II studies across multiple tumor types. It achieved statistically significant prospective validation of its AP3 patient selection approach via its ACR-368 OncoSignature assay. This assay demonstrated an ability to identify ovarian and endometrial patients sensitive to ACR-368 monotherapy.

In April, the company reported initial positive clinical data from a phase II study of ACR-368 for patients with locally advanced or metastatic, recurrent platinum-resistant ovarian cancer or endometrial adenocarcinoma. The study demonstrated an initial combined overall confirmed response rate of 50%, exceeding the clinical bar, which the company thinks is required to improve over standard of care.

The stock of Acrivon Therapeutics has risen 65% year to date. The consensus estimate for 2024 loss has narrowed from $2.98 per share to $2.47 per share over the past 60 days. The company has a Zacks Rank #2.

Price and Consensus: ACRV

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Heron Therapeutics, Inc. (HRTX) : Free Stock Analysis Report

Aquestive Therapeutics, Inc. (AQST) : Free Stock Analysis Report

Bioventus Inc. (BVS) : Free Stock Analysis Report

Cardiol Therapeutics Inc. (CRDL) : Free Stock Analysis Report

Acrivon Therapeutics, Inc. (ACRV) : Free Stock Analysis Report

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