2 small-cap champions that could make you a million

Since first becoming a public company at the end of 2015, shares in Diurnal(LSE: DNL) have failed to ignite investor interest. Indeed, over the past 21 months shares in the company have lost 13% although, after a miserable end to 2016, they have gained 27% since the beginning of this year.

However, despite the company's sluggish start, I believe Diurnal has a bright future ahead of it.

Gearing up for growth

Diurnal is a speciality pharmaceutical company targeting patient needs in chronic endocrine (hormonal) diseases -- a speculative but potentially lucrative business.

As of yet, the company has no revenues and is lossmaking. Figures released today show that the firm made an operating loss of £12.1m for the six months to 30 June, up from £7m in the same period last year. Cash and cash equivalents at 30 June 2017 were £19.9m with a cash outflow during the first half of £10.5m.

The company's prospects should change significantly when its first product hits the market, which is expected to occur in the next few months. Management is expecting European authorities to give the green light to the firm's Infacort product before the end of the year, with first sales projected in 2018.

Ready to hit the market

Infacort is Diurnal's most clinically advanced product and is the first preparation of hydrocortisone (the synthetic version of cortisol) specifically designed for use in children suffering from adrenal insufficiency. Currently, there is no licensed hydrocortisone preparation in Europe or the US specifically intended to treat these young patients, giving Diurnal first-mover advantage.

And after the release of Infacort in 2018, Diurnal is expecting the results of its phase III testing of Chronocort, a similar treatment that's produced positive results in testing so far. If Chronocort proves a success, first sales are projected in 2019. The combined market for Infacort and Chronocort is estimated to be over 400,000 patients.

Diurnal is on the verge of a growth spurt, and investors are set to profit as the firm becomes the first mover in a lucrative market.

High risk, high reward

Mereo BioPharma Group(LSE: MPH) is another early-stage biotech with enormous potential. This company is an interesting one because it buys up orphan treatments from larger pharmaceutical companies that are looking to streamline their portfolios. Mereo then does all the hard work to get these products through the testing stages.

Its initial portfolio consists of three mid-to-late-stage clinical assets that were acquired from Novartis in July 2015, each with proof of concept data in the indication that Mereo is now developing. At the end of June, the company had a cash balance and undrawn debt facilities of £77m with which to finance deals.

Unlike Diurnal, Mereo does not plan to market its products. Instead, the firm is planning to partner or sell the products upon completion of additional clinical studies decreasing risk and speeding up portfolio monetisation.

Unfortunately, its strategy makes it difficult to value the company with traditional valuation metrics. The firm's traits are more akin to a private equity business rather than pharmaceutical. Nonetheless, this is still a strategy that could turn out to be highly lucrative for shareholders as the company develops a streamlined regime to push new treatments through the testing stage, a process that can be costly and complicated.

Time to buy, sell or hold?

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Rupert Hargreaves has no position in any share mentioned. 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.

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