Biotech stocks have proven time and again to be outstanding growth vehicles for risk-tolerant investors. Underscoring this point, companies like Axsome Therapeutics, Immunomedics, and Novavax have each generated enormous returns on capital for investors within an exceedingly short period of time. 

Which biotech stocks might be the next big gainers? While it's frankly impossible to predict the next Axsome, Immunomedics, or Novavax with any degree of certainty, the small-cap biotechs Sorrento Therapeutics (NASDAQ:SRNE) and Trillium Therapeutics (NASDAQ:TRIL) appear to have a real shot at following in their footsteps from a growth standpoint. Here's a brief overview of the potential risks and rewards associated with these two small-cap biotech stocks. 

A woman holding a fanned out stack of hundred dollar bills while standing in front of a light blue background.

Image source: Getty Images.

Sorrento: A battleground coronavirus stock

Sorrento essentially sports three core product development platforms: COVID-19 drug, vaccine, and diagnostic products; immuno-oncology, and pain management. Investors, though, have clearly keyed in on the company's suite of experimental COVID-19 products this year.

The underlying reason is that Sorrento is developing one of the most comprehensive COVID-19 platforms in the industry. The company's COVID-19 pipeline currently consists of an early stage vaccine known as T-VIVA-19, a powerful neutralizing antibody dubbed STI-1499 (aka COVI-Guard), a rescue intervention therapy, abivertinib, indicated for patients suffering from acute respiratory distress, along with antibody and saliva diagnostics -- COVI-Track and COVI-Trace, respectively.

Taken together, these COVID-19 product candidates may be worth billions in future sales for the biotech. Wall Street, in fact, has Sorrento's high-end revenue estimate for 2021 coming in at a lofty $3 billion, thanks mainly to its COVID-19 franchise. That's quite a potential haul for a company with a market cap of $1.62 billion at the time of writing. 

Sorrento's COVID-19 aspirations have drawn a fair amount of criticism from short-sellers, however. The short-thesis is that the company won't be able to beat out the wave of competitors for any of its COVID-19 product candidates. COVI-Guard, for instance, is unlikely to beat similar therapies to market from either Eli Lilly or Regeneron. The vaccine space, on the other hand, could be oversaturated by the time T-VIVA-19 even makes it into a pivotal stage trial.  

The bottom line is that Sorrento is a high-risk, high-reward biotech stock. If the company can break into the COVID-19 space with one or more products in a timely manner, its shares should skyrocket. If not, the biotech may be in for a sharp pullback. Invest accordingly. 

Trillium: A cancer stock with lots of room to run

Trillium's shares are presently up by a staggering 1,260% so far this year. The biotech's stock has taken flight in 2020 for three key reasons:

  1. AbbVie and Gilead Sciences have both recently invested huge sums of money in CD47-based cancer therapies -- a novel immune checkpoint pathway. In simplest terms, CD47-based therapies target an innate checkpoint pathway, also known as the "don't eat me signal", employed by some cancer cells to evade immune detection. Trillium's lead clinical candidates, TTI-621 and TTI-622, are both CD47-targeting antibodies. Hence, the sudden interest from Wall Street and retail investors alike. 
  2. Last week, Trillium reported that the ongoing dose-escalation studies for TTI-621 and TTI-622 are going well. The company thus plans on exploring the safety, and preliminary efficacy signals, of these cancer-fighting therapies at higher doses.
  3. Big pharma titan Pfizer invested $25 million in Trillium's common stock last week. This equity stake is fairly small in absolute terms, but it might be a prelude to a larger investment later down the road. 

What's the risk? The CD47 arena has quickly become the next big thing in immuno-oncology. But that doesn't mean that Trillium will be a major player in the space once everything is said and done. Gilead, through its $4.7 billion buyout of Forty Seven earlier this year, is much further along in the clinical trials process.

It is also interesting to note that AbbVie passed over Trillium in its quest for a CD47 asset. What that means is unclear exactly, but AbbVie has been fairly successful at picking winners when it comes to early stage clinical candidates -- with the one glaring exception of its rather costly failure in immunotherapy, Rova-T.

What's the potential reward? Even after Trillium's explosive move higher this year, the company's market cap remains in small-cap territory at $1.2 billion. That's not surprising, given that its lead clinical assets are only in dose-escalation studies at this point.

But it would be shocking if the biotech's value didn't rise into large cap territory (greater than $10 billion) if and when these high-value compounds enter late-stage trials. Stated simply, Trillium's stock might be capable of another 1,000% gain over the next two to three years.    

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.