What happened

Shares of Cara Therapeutics (NASDAQ:CARA) rose nearly 19% last month, according to data provided by S&P Global Market Intelligence. There wasn't any news in September, but the small-cap pharma company has erupted onto the scene in 2018 thanks to its budding development pipeline.

The company's therapeutic approach centers on developing drugs that selectively target certain opioid receptors in the central nervous system. That could result in treatments for pain accompanied by significantly lower risk of dependence, an important detail given the ongoing opioid addiction crisis in the United States. But the biggest and nearest catalyst for the business has nothing to do with pain indications at all.

A chart on a chalkboard showing steady gains and then a sudden turn downward

Image source: Getty Images.

So what

Drugs that selectively target specific opioid receptors while sparing others may have a lot more potential than treating pain. The same approach could treat certain types of itching, such as that caused by hemodialysis therapy in patients with chronic kidney disease.

Cara Therapeutics' lead drug candidate, Korsuva, recently began phase 3 trials to explore its potential as a treatment for hemodialysis patients with chronic kidney disease-associated pruritus, or CKD-aP. The midstage trial data were solid enough to attract the attention of German pharma giant Fresenius and land a $50 million up-front payment and $20 million equity investment. If the drug earns marketing approval, then the small-cap company could receive $470 million in milestone payments on top of royalties.

Now what

Given the massive windfall awaiting investors if Korsuva proves successful, it's not surprising that Cara Therapeutics rose from relative obscurity this year and steadily earned its way to a $900 million market cap by the end of September.

That said, investors are still aware that despite the potential, this remains a largely binary investment. That likely explains why Cara Therapeutics stock has fallen 20% in the first two weeks of October, although there hasn't been any detrimental news. But if investors were willing to bet on the company's chances of success in September, then it could be worth a closer look now.

Maxx Chatsko 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.