Why Is Wall Street Gobbling Up These 2 Small-Cap Biotech Stocks?

When institutional investors start buying large blocks of shares in a company, it could be a good sign that the stock is getting positive attention because of its potential to move higher. In the last quarter, we saw institutions dramatically increase their stake in Prothena Corp.andFive Prime Therapeutics

Although each company has fallen by double digits year to date, Wall Street apparently believes firmly in their long-term prospects. Let's take a closer look at what might be fueling this heavy institutional buying lately. 

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Prothena's experimental AL amyloidosis treatment looks promising
Prothena is developing a novel treatment for AL amyloidosis with cardiac involvement that has caught Wall Street's eye. AL, or amyloid light-chain, amyloidosis is a rare blood disorder characterized by protein fibrils that invade various organs, leading to the formation of protein deposits. The disease tends to progress rapidly, often resulting in death. 

Prothena's experimental treatment for AL amyloidosis is currently known as NEOD001. It's designed to neutralize the amyloid fibrils and dissolve the protein deposits, thereby improving organ function. 

In an early-stage study, patients receiving the drug reported no serious adverse events, but a number of patients did show encouraging signs of improved cardiac function. Based on these results, the company plans on launching a combined mid- and late-stage study in the fourth quarter.

Given that there are no approved therapies for this rare disorder and NEOD001 has a unique therapeutic mechanism in the dissolution of protein deposits, you might want to keep tabs on this small-cap biopharma moving forward.  

Five Prime's novel platform has attracted the attention of major pharmas
The little-known biotech Five Prime Therapeutics is starting to garner attention from both Wall Street and Big Pharma alike. At its core, Five Prime's commercial prospects revolve around its extensive protein library that is being used to discover new therapeutic targets.

Although this isn't exactly a new approach to drug development, Five Prime's high-throughput protein production system has allowed it to build out one of the most complete protein libraries in the industry. As a result, Big Pharmas such as Bristol-Myers Squibb have recently signed collaborative research agreements with this tiny biotech to develop novel immuno-oncology therapies. The agreement with Bristol entitles Five Prime to developmental and regulatory milestone payments that should help reduce the frequency of secondary offerings that are part and parcel of clinical-stage biopharmas.

Five Prime is also developing its own host of immuno-oncology therapies, which is expected to become a major focus of the company moving forward. Overall, I think we'll see more licensing and partnership deals come Five Prime's way, given the completeness of its protein library and the high barrier to entry for potential rivals.  

Foolish wrap-up
While institutional buying is a positive sign for any stock, it's important to remember that small-cap biopharmas like Prothena and Five Prime Therapeutics are risky investments by their nature. Specifically, we may never see either company produce a commercial product from their current host of clinical candidates, and any lucrative market is surely to attract a fair number of competitors. 

That said, I think these two companies do offer compelling value propositions for investors with a long-term outlook. Prothena's flagship drug could become a breakthrough therapy in AL amyloidosis, and it is launching other intriguing clinical activities in the near term as well. Five Prime Therapeutics stands to become a "go-to" company for the development of new immuno-oncology targets, which is a red-hot area in biopharma these days. Put simply, it's easy to see why Wall Street is noticing these companies. As such, I think they are definitely worth putting on your watch list.

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The article Why Is Wall Street Gobbling Up These 2 Small-Cap Biotech Stocks? originally appeared on Fool.com.

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