What happened

Shares of resTORbio, Inc. (NASDAQ:TORC) are skyrocketing today, up 65.5% as of 11:42 a.m. EDT, after the small biotech announced results from a phase 2 clinical study of experimental drug RTB101 in treating respiratory tract infections (RTIs) in elderly patients. 

ResTORbio reported a statistically significant 30.6% reduction in patients with RTIs in the group of patients receiving a 10 mg dose of RTB101 compared to patients on a placebo. Statistically significant improvements were also seen in subsets of the patients in the study, with a 68.4% reduction in RTIs among asthma patients age 65 and older and a 66.7% reduction in RTIs in patients age 85 and older.

Female scientist looking through microscope with another scientist holding a dropper and test tube

Image source: Getty Images.

So what

Any progress in treating respiratory tract infections is a big deal. RTIs ranks as the No. 4 cause of hospitalizations in the U.S. They also are the seventh leading cause of death for older Americans aged 65 and older. RTIs are especially problematic in asthma patients. Despite the serious nature of these infections, there are no FDA-approved drugs for treating many types of RTIs.

The results from the phase 2 study are an especially big deal for resTORbio. The company doesn't have any other products on the market. RTB101 is its lead (and only) candidate.

Success in treating RTIs could bode well for RTB101's chances in treating other indications. ResTORbio has also evaluated the drug in phase 1 clinical studies targeting aging-related diseases including uterine tract infections (UTIs) and heart failure with preserved ejection fraction (where the amount of blood pumped from the heart's left ventricle with each beat is greater than 50%).

It should be noted, though, that a combination of RTB101 with a chemotherapy, everolimus, didn't meet the primary endpoint of the phase 2 clinical study. ResTORbio suspects that too much inhibition of the TORC1 protein might not be as effective in elderly patients. Both RTB101 and everolimus, which is marketed under brand names Afinitor and Zortress, are TORC1 inhibitors. 

Now what

ResTORbio now plans to talk with the FDA about a path forward to conduct a pivotal phase 3 clinical study for RTB101. There weren't any yellow flags about the safety profile of the drug in the phase 2 study, so it seems like a foregone conclusion that the biotech will be able to advance RTB101.

If RB101 eventually wins FDA approval, Merrill Lynch thinks the drug could generate risk-adjusted peak annual revenue of nearly $450 million. ResTORbio stock could become a huge winner over time if clinical studies are successful. The problem, however, is that there's no way to know for sure if those studies will go well.

Also, resTORbio could be tempted to use the recent surge in its share price to raise more cash through a stock offering. While the company had $135.7 million in cash and cash equivalents on hand at the end of the first quarter, that's only enough to fund operations into mid-2019. Expenses will also probably increase with a phase 3 study potentially around the corner. 

I think investors should keep resTORbio on their radar screens. But with the potential of a dilution-causing stock offering on the way and uncertainty with further clinical studies, it's probably best to sit on the sidelines with this biotech stock for now.