2 Small-Cap Biotech Stocks Well Positioned for a Breakout

Key Points

• Pulmonary sarcoidosis patients could soon get the treatment option they've been waiting for from aTyr Pharma.

• MoonLake Immunotherapeutics is running multiple phase 3 programs for its lead candidate.

• MoonLake Immunotherapeutics and aTyr Pharma both have relatively modest market valuations at the moment.

• 10 stocks we like better than aTyr Pharma ›

For decades, savvy investors have been finding stocks that can produce dramatic gains in relatively short timeframes by sifting through the biotechnology universe. In this wonky industry, positive clinical trial results can cause small-cap stocks to double in value in a single trading session.

At the moment, aTyr Pharma (NASDAQ: LIFE), and MoonLake Immunotherapeutics (NASDAQ: MLTX) are running clinical trials that could lead to big gains for their stock prices, depending on the results.

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1. aTyr Pharma

Pulmonary sarcoidosis is a chronic lung condition that is slowly suffocating approximately 200,000 Americans who currently lack treatment options. The lead program in aTyr Pharma's pipeline, efzofitimod, is a novel tRNA synthetase-derived therapy candidate aimed at the condition.

Everyone with a life science background knows that tRNA synthetases are responsible for assembling individual amino acids into proteins. Somewhat recently, we've also learned that they play a role in diseases related to inflammation.

In July, aTyr Pharma enrolled the last pulmonary sarcoidosis patient in the phase 3 Efzo-Fit study with efzofitimod. With all participants enrolled, management expects to report topline results by the end of September.

In a 37-patient phase 2 trial, patients showed lower dependence on steroids compared to the placebo group, but the results weren't strong enough to be considered statistically significant. That said, three out of nine patients given the highest dosage were able to taper off from steroids completely. Steroid use reduction is the primary endpoint of the phase 3 Efzo-Fit trial.

A dearth of treatment options means an effective new pulmonary sarcoidosis drug could rake in more than $1 billion in annual sales at its peak. Drugmaker stocks tend to trade at high-single-digit multiples of total sales, but this stock's been trading at a market cap of just $524 million. If aTyr Pharma reports a statistically significant improvement in the larger phase 3 trial, its stock price could soar.

2. MoonLake Immunotherapeutics

Hidradenitis suppurativa is a debilitating skin condition marked by severe inflammation. Treatment options are limited despite being a relatively common disease that affects roughly 2% of the overall population.

MoonLake Immunotherapeutics' lead candidate sonelokimab is in a pair of identical phase 3 trials expected to enroll about 800 hidradenitis suppurativa patients. Investigators are looking for the percentage of patients who achieve a 75% symptom reduction, and there's a good chance the study will succeed. In a phase 2 trial, 57% of patients achieved a 75% reduction after 24 weeks of treatment.

In September, MoonLake expects to present top-line results from the phase 3 hidradenitis suppurativa studies it is running. Results in line with what we saw in phase 2 could send the stock soaring. At recent prices, the stock sports a modest $3.5 billion market cap.

This September isn't the end of the road for MoonLake's lead candidate. In addition to hidradenitis suppurativa, sonelokimab is in a pair of phase 3 trials with psoriatic arthritis patients. MoonLake expects to announce primary endpoint results from a psoriatic arthritis trial in the first half of 2026.

Know the risks

There's a good chance that shares of MoonLake and aTyr shoot higher in the weeks ahead. That said, investors need to remember two things. First, clinical trials are generally unpredictable. And second, these are pre-commercial businesses that can't tell us when they'll start recording sales.

MoonLake is arguably less risky because it finished June with $425.1 million in cash and securities. Over the past 12 months, it lost $179 million, suggesting it has at least a couple more years before it needs to raise capital again. If the upcoming hidradenitis suppurativa results don't excite investors, it can probably coast until after it has a chance to report psoriatic arthritis results.

Cash burn is a more immediate issue over at aTyr Pharma. The company finished June with just $83 million in cash after burning through $66.6 million over the past 12 months. If its upcoming phase 3 readout with pulmonary sarcoidosis patients isn't a success, raising enough cash to take efzofitimod in another direction could be extremely challenging. Investors want to tread lightly with this stock regardless of their risk tolerance.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.