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Small-Cap Biotech Stocks Hold Big Promise in 2018

by Jan 7, 2018

With the GOP tax bill signed into law and the New Year now upon us, it’s time to look at one of the stock market sectors with the most potential for growth in 2018. The cut in corporate tax rates has led many analysts to believe that small-cap companies will be one of the big winners from the new tax reforms.

Small-cap companies

President Trump’s impact on the NASDAQ, Dow, and other major indices has been well documented over the past year. However, little has been written about the Russell 2000 Index. Composed of small-cap companies, the Russell 2000 Index is up 29% since Trump took office.

The term “small-cap” is used to describe companies that are publicly traded by enjoy fairly small market capitalizations. The definition of small cap can vary, but it’s generally viewed as a company with a market capitalization of between $300 million and $2 billion.

According to Goldman Sachs Asset Management representative Katie Koch, there is great value to be found in small-cap stocks. To really get a feel for the value of small-cap stocks, we need only compare corporate tax rates before the Trump tax reforms and after.

Prior to the GOP-led reforms, companies on the Russel 2000 Index paid a median corporate tax rate of 31.9%, whereas the larger multi-national companies on the S&P 500 paid a rate of 28%. According to Yahoo Finance, the median tax rate for the 30 mega-cap stocks on the Dow Jones Industrial Average is even lower at 23.8 %.

“It's pretty clear from a corporate perspective that small-caps are set to benefit the most from the Republican tax reform plan,” Koch noted in an interview back in September.

A group of small-cap biotech stocks in particular will be strong plays in 2018. That’s largely due to the corporate tax reform. However, regulatory approval decisions expected to come later this year could also give them a boost.

Achaogen Rigel Pharmaceuticals and Tetraphase Pharmaceuticals are two small-caps that have regulatory decisions pending. If those are approved, their stocks could soar this year.

Achaogen (AKAO)

Although 2017 was a miserable year for Achaogen, the small-cap company submitted a New Drug Application (NDA) to the FDA for the antibiotic Plazomicin in late 2017.

The FDA recently granted priority review status for the submission. An approval decision is expected by early summer of 2018, so don’t wait too long to jump on this one.

Rigel Pharmaceuticals (RIGL)

Unlike Achaogen, Rigel Pharmaceuticals enjoyed a stellar 2017, with the company’s stock price increasing by 63%. Most of those gains came in October of last year, when the company announced the FDA wasn't planning an independent advisory committee meeting to discuss the NDA for Tavalisse—a treatment for patients with chronic and persistent immune thrombocytopenia.

The FDA is scheduled to make an approval decision on Tavalisse this spring. Sufferers from immune thrombocytopenia should get some relief—and investors in small-cap biotech stocks should make a buck.

Tetraphase Pharmaceuticals (TTPF)

Despite performing lousy in 2015 and 2016, Tetraphase Pharmaceuticals is one of the most intriguing small-cap biotech stocks in 2018. However, last year was a different story, as its share price jumped 56%. The gain would have been even higher if not for Tetraphase's $60 million stock offering in July, which diluted the value of existing shares.

Similar to Achaogen, Tetraphase’s R&D department focuses on developing new antibiotics to treat multidrug-resistant infections. Late last summer, the company filed for European approval of intravenous Eravacycline—a treatment for complicated intra-abdominal infections. A decision is expected later this year.

Tetraphase also completed its FDA submission for IV Eravacycline earlier this month. Assuming the NDA is accepted by the FDA, the drug could win U.S. approval by Q4 2018.