Goldman Sachs Expects Market Sentiment To Support Smaller Firms, Sees Upside of up to 165% for Two Biotech Stocks

The 2023 bull market, led by large-cap tech stocks, changed momentum this year to benefit smaller companies due to several economic trends, like the slowing rate of inflation growth that is driving up bets on a September rate cut by the US Federal Reserve.

According to TipRanks, Goldman Sachs chief US equity strategist David Kostin cited factors like declining inflation, steady economic growth, heightened market probability of a Republican sweep, and "forecast compression in the EPS growth premium of large-cap stocks vs. peers" that are driving the reversal "against a backdrop of extreme equity market concentration."

He believes small- and equal-weight benchmarks will keep outperforming unless the second-quarter reports of mega-cap tech companies prompt analysts to bump their sales forecasts for the latter half of this year and 2025. Goldman Sachs analysts also forecast a potential upside of up to 165% for two small-cap biotech stocks focusing on gene therapy and autoimmune diseases.

RegenXBio (Nasdaq: RGNX)

According to Goldman Sachs analyst Paul Choi, the biggest asset of the gene therapy company RegenXBio is its robust and diverse pipeline of single-dose drug candidates for severe diseases. RegenXBio leverages Adeno-Associated Virus (AAV) therapeutics to place modified genes into the affected cells of patients.

"We see the potential for RGNX's gene therapy platform to address unmet needs in multiple attractive markets," Choi said. The company currently has three treatments in its pipeline to treat diseases with few or no existing therapies. The RGX-121 candidate to treat Hunter syndrome (MPS II) by delivering the human iduronate-2-sulfatase gene to the central nervous system is progressing through clinical trials. RegenXBio plans to submit a Biologics License Application for the drug this year. "The imminent filing and anticipated approval of RGX-121 for MPS II (Hunter syndrome) provide near-term regulatory catalysts and a commercial product with a small but well-identified opportunity," Choi added.

Meanwhile, the RGX-202 is being tested as a candidate for treating Duchenne muscular dystrophy by using a "novel microdystrophin construct" as its active agent. The company began enrolling pediatric patients aged between one and three in its Phase I/II AFFINITY DUCHENNE trial last month. It expects a major trial between the third and fourth quarters of 2024.

"We view the limited RGX-202 DMD data to date as intriguing and look for additional dosing data and longer-term follow-up, but we see it potentially opening up additional (i.e., older) patients not addressed by current therapies (e.g., SRPT's Elevidys)," the Goldman Sachs analyst opined. RegenXBio's third drug, ABBV-RGX-314, is being developed in collaboration with AbbVie to treat chronic retinal diseases. Clinical Phase II AAVIATE trial data for the novel, one-time subretinal treatment is expected in Q3 as the company considers regulatory submissions in 2026.

"We see a tangible catalyst path (additional DMD data, Hunter filing, and suprachoriodal wAMD/DR data in 2H24; subretinal wAMD data and filing in 2025) driving RGNX's share performance over the near- to intermediate term," Choi explained. He had a "Buy" rating on the stock with a 12-month target price of $38, implying an upside of over 165% from its last close of $14.33 on July 26. His target price is still below the Wall Street consensus average of $39.44 per share.

Viridian Therapeutics (Nasdaq: VRDN)

Goldman Sachs analyst Richard Law highlighted biotech firm Viridian Therapeutics' treatment development program for novel drugs for autoimmune diseases, such as thyroid eye disease (TED).

The company has two drug candidates for TED in clinical trials. The VRDN-001 drug is an IV monoclonal antibody administered via intravenous infusion, which showcased a favourable safety profile earlier and is now undergoing two Phase 3 trials. Meanwhile, VRDN-003 is another candidate similar to the VRDN-001 drug but with an extended half-life to improve patient comfort.

According to Law, Goldman Sachs' "Buy" rating is based on the expectation of "VRDN-003 potentially having a best-in-class SC profile in TED. "Although Tepezza [competitor] is now an established SOC, we believe the new start nature of the TED market and strong enthusiasms from clinicians willing to prescribe SC over IV products will open the opportunity for VRDN-003 to compete well. Although it is still early and many novel assets have not reported much data, '003's half-life extension, small injection volume, and autoinjector pairing could be positioned well against SC assets that lack these attributes," he explained.

"We believe VRDN-001's shorter treatment course has more limited competitive advantages over Tepezza but could help establish a network of payors/prescribers for '003's launch. We model both assets achieving ~$1.8B WW non-risk-adjusted, or ~$798M risk-adjusted, peak sales in 2040," the analyst added. Law had a 12-month target price of $23 per share for Viridian, implying an upside of over 38% from its close of $16.33 on July 26. However, Wall Street analysts saw more upside, with an average target price of $33.08 or an almost 100% increase over one year.

Biotech Industry Outlook

According to a recent report published by Nova One Advisor, the global biotech industry was worth $1.54 trillion last year and could reach a valuation of $5.68 trillion by 2033. The US made up 41% of the market share, given the presence of key players and increasing R&D, enabling accelerated adoption of AI capabilities in existing life sciences platforms.

Moreover, the top trends in biotech included advancements in gene editing, such as CRISPR-Cas9 techniques, and breakthroughs in immunotherapy, such as CAR-T cell therapies for cancer treatment.

A Fortune Business Insights report also highlighted that the gene therapy market could be valued at over $35 billion by 2027 amid a growing prevalence of oncology and genetic disorders among the masses. The pandemic served as a wake-up call for the overall life sciences industry, which has triggered high R&D activity to find high-efficacy treatments for existing and potential threats.

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