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Forget ‘Big Pharma’, my money’s on this smoking hot small-cap stock

Many investors are attracted to large pharmaceutical companies for the relative certainty of earnings and high dividends. Think GlaxonSmithKline and AstraZeneca.

However, those willing to embrace more risk for the prospect of sizeable capital gains should look further down the market spectrum. One small cap that’s grabbed my attention in recent weeks has been Motif Bio (LSE: MTB) — a dual-listed biotech company (listed on NASDAQ as well as AIM) focused on tackling superbugs that have developed resistance to existing antibiotics.  

You may not have heard of the business before but last week’s news that Iclaprim, a treatment designed for combat acute bacterial and skin structure infections, has made it through the first of two large Phase 3 trials (REVIVE-1) means it should start hitting many investors radars over the next few months. Here’s what you need to know.

Seriously undervalued

Passing through a Phase 3 trial — the final stage in clinical testing — isn’t easy. Required by regulators before a new treatment can be marketed, many companies fail to get this far, underlining how risky investing in biotech stocks can sometimes be. Here, Motif Bio bucks the trend.

REVIVE-1 demonstrated that Iclaprim met two desired end points. First, it delivered early clinical response by reducing the size of skin lesions by at least 20% in 48-72 hours after starting the course of antibiotics. Secondly, it met test of cure targets after patients showed an improvement in the 7-14 days following the completion of treatment.

It gets better. Results suggested that Iclaprim was as effective as Vancomycin, one of the leading treatments currently used. What’s more, any side effects were deemed mild and clinically irrelevant. The knockout punch, however, is that Iclaprim is safe to use with those who have bacterial skin infections and kidney disease, something that can’t be said for its competitor. So, what happens next?

Assuming all goes to plan (results from the identical REVIVE-2 trial are expected in the second half of the year), Motif will file a new drug application to the US Food and Drug Administration in the first half of 2018. A Marketing Authorisation Application will also be finding its way to the European Medicines Agency around the same time. The company hopes to receive approval on both fronts before the end of 2018.

Although CEO Graham Lumsden remains fairly tight-lipped on the matter, there’s also the possibility of the company announcing news concerning licencing deals over the next few weeks, along with details on funding for REVIVE-2.

Multi-bagger in the making?

Right now, Motif Bio has a market cap of just £76m. That’s after the 60% rise in its share price since the end of March and announcement of REVIVE-1 results. It’s also substantially less than valuations attached to industry peers such as Paratek (market cap just short of $600m). While short term traders will come and go, the eventual adoption of Iclaprim in hospitals — generating $1bn of annual revenues in the US alone — could lead to substantial profits for long-term holders.

Of course, buying small-cap companies — even those offering significant upside — still requires patience and a willingness to tolerate volatility. Although I’ve backed the company to succeed (and some brokers now have target prices of 125p), it’s essential that prospective investors consider their willingness to tolerate capital risk before taking the leap.

That said, if learning about Motif Bio has whetted your appetite for promising small cap shares, you'll definitely want to read about another opportunity identified by Mark Rogers -- Head of UK Investing at the Motley Fool.

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Paul Summers owns shares of Motiv Bio. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.