5 Small-Cap Biotechs In Citi's Buy List With Big Upside Potential

The highly volatile biotech stocks present a high-risk-high-reward proposition. Judicious stock picking is essential to ride the superlative rally in some of these stocks in the wake of make-or-break binary events.

Here's a brief on a few small-cap biotech stocks Citigroup analyst Yigal Nochomovitz recommends as investment worthy and the rationale behind the thinking. The analyst assumed coverage of these stocks on May 24.

Dicerna Pharmaceuticals Inc DRNA: Buy rating, $30 price target (154 percent upside potential)

Dicerna's lead candidate DCR-PHXC is in a pivotal Phase 2 study for primary hyperoxaluria, or PH, Types 1 and 2 – a severe, genetic liver disorder that results in the overproduction of oxalate, Nochomovitz said.

Although Alnylam Pharmaceuticals, Inc. ALNY has a competing product in a Phase 3 trial, the approach of its treatment candidate makes it effective only for PH Type 1, while Dicerna's is amenable to treat all three subtypes of PH, he added.

Dicerna's DCR-HBV being evaluated for hepatitis B virus infection represents a large upside opportunity, with the proof of concept data due in the fourth quarter of 2019. If the data comes in positive, a partnership could be the next, Citi said.

Fate Therapeutics Inc FATE: Buy rating, $26 price target (42 percent upside potential)

Fate's iPSC-based platform to produce cancer-killing cells could be game changing compared to the current autologous therapies, Citi said in support of its bullish stance. The key differentiating factors, according to the firm, are the former focuses on NK-cells as opposed to T-cells, targeting all cancer cells, acting rapidly and not causing GvHD. The manufacturing process isn't complex either, it added.

Nochomovitz noted that the key catalyst is the efficacy data from the two iPSC programs due in the second half of 2019, which is expected to produce the first-ever proof-of-concept data for iPSC-based NK-cell therapy.

Harpoon Therapeutics Inc HARP: Buy rating, $23 price target (109 percent upside potential)

Potential for upside exists for Harpoon over the next 12 months from the initial clinical data from its lead drug HPN424 targeting PSMA in prostate cancer and HPN536 targeting mesothelin-positive cancer, Nochomovitz said. The company is developing off-the-shelf T-cell engagers, or TriTACs, for cancer.

Citi views the TriTACs as the next-gen version of Amgen, Inc. AMGN's established BiTE platform but with a better half-life.

The key catalysts are:

• HPN424 Phase 1 data in metastatic castration-resistant prostate cancer, or mCRPC, in the second half of 2019
• HPN536 in mesothelin positive cancers in the first half of 2020
• AMG160 data in mCRPC in 2019/2020

Arcus Biosciences Inc RCUS: Buy rating, $25 price target (177 percent upside potential)

Arcus has an attractive risk/reward profile, with the potential for 5-10 percent upside from each of the three key data events expected in 2019, Nochomovitz said.

The three events are:

• Early safety and biomarker data from 10 patients at ASCO 2019
• Safety, biomarker and early efficacy data from 20 patients at an analyst event in June
• More mature data from 35-40 points, durability and better insight into biomarker associated responses at the ESMO/SITC 2019

Acceleron Pharma Inc XLRN: Buy rating, $66 price target (59 percent upside potential), revised up from $63

There is potential for significant upside over the next 12-18 months, with Acceleron's lead drug Luspatercept launching in early 2020, key catalysts from Luspatercept expansion and an evolving pipeline, Citi said.