I see three "buckets" in the COVID-19 space: vaccines, diagnostics, and treatments. Vaccines have been the big winner so far: One small vaccine company, Novavax (NVAX 22.61%), had an amazing year in which it jumped from $4 per share in January 2020 to $129 in December.

Why have vaccines been the big winner? It's because the market opportunity is so huge -- every human being on the planet could be vaccinated. Healthy people who have no COVID-19 symptoms whatsoever might get a shot.

However, the diagnostic space is smaller. We need diagnostics to distinguish people who have COVID-19 from people with influenza, or the common cold. But the market opportunity is smaller than the vaccine space -- it's mostly for sick people who have symptoms.

And the treatment vertical for patients who have been hospitalized is tinier still. Humanigen (HGEN) has a drug called lenzilumab that it hopes will stop the cytokine storms that kill people in intensive care. So Humanigen is going after a very small market opportunity -- people with a serious chance of dying from COVID-19.

Doctors in full protective gear in an intensive care unit, trying to keep a patient alive.

Image source: Getty Images.

Obviously Humanigen's drug is a very important step up for humanity -- but for investors the potential upside is a lot smaller. Nonetheless, Humanigen is an exciting company in this space. That's because the company is a small cap ($1 billion valuation), and so it has a significant upside that large-cap stocks don't really have. I believe that we're all going to be surprised with the demand for this drug, and that early investors are going to make a lot of money. Here's why I think that might happen (and why the long-term story is attractive as well).

Focusing on cytokine storms is brilliant

While the Food and Drug Administration (FDA) has approved one drug to treat COVID-19, and given Emergency Use Authorizations (EUA) for other drugs, these pharmaceuticals have had uneven results. Humanigen is bullish on lenzilumab because it's focused on stopping the cytokine storm.

What is a cytokine storm? It's a bad side effect that can happen when your body's immune system fights its war against foreign invaders. In general, your immune system is a wonderful thing, and it's what keeps you alive when your body is attacked by sketchy microbes. It's your immune system that causes inflammation, your immune system that causes fever, your immune system that is saving your life. But sometimes your immune system can go haywire, and start killing off cells that have been infected. Many doctors theorize that this is what happens in severe COVID-19 cases. There's a cytokine storm, your immune system destroys more and more lung tissue, and you can't breathe.

The are no FDA-approved drugs for a cytokine storm. If doctors suspect that that's what's happening, they might use drugs to tamp down your body's immune system. But of course this is dangerous, because it's your adaptive immune system that is fighting the disease and keeping you alive.

Humanigen's drug is an antibody that targets a specific protein, GM-CSF (a cytokine itself), and shuts it down. Summarizing an academic study reported in Science Immunology, the company informed investors that "GM-CSF is a targetable marker of COVID-19 severity. GM-CSF is elevated early, scaled with severity, and is central to the inflammatory response in COVID-19 but not severe influenza." Indeed, GM-CSF levels are ten times higher in patients who died from COVID-19.

GlaxoSmithKline (GSK 1.51%) also thinks that shutting off the GM-CSF target is critical to fighting off a cytokine storm. Unfortunately GSK's drug failed its phase 2 trial. Humanigen's, on the other hand, has been quite successful.

Phase 3 data is positive

Humanigen has reported positive phase 3 data from patients who were given lenzilumab. In the study, all 520 hospitalized patients were given the standard of care for extreme COVID-19 cases: steroids, remdesivir, or both. Half the patients were also given Humanigen's drug, and the other half were given placebo. The group that received lenzilumab were 54% more likely to survive without ventilation.

I suspect Humanigen has a significant opportunity here. Hospitals will want to stock up on a drug that's specifically designed to ward off a cytokine storm in COVID-19 patients. And such a drug has applications far beyond this pandemic. While there are several COVID-19 drugs that have received EUAs from regulators, Humanigen might be the first company to market a drug to stop the cytokine storm. If this small cap gets an authorization or an approval for that indication, that will open up a very large market opportunity for the company.

That's because a cytokine storm is a biological event that happens in a wide variety of human diseases and conditions -- including cancer, influenza, graft-versus-host disease, pneumonia, sepsis, and pancreatitis -- as well as following blood transfusions.

To be sure, lenzilumab won't work against every version of cytokine storm; the question for this drug is whether GM-CSF is implicated in the storm. If the diagnosis is right, the treatment should work. So while the near-term verdict on the EUA is causing a lot of volatility in the stock, what might be incredibly valuable is the long-term story.

Humanigen is branding itself as the "cytokine storm company," and it's likely to be the first company to get a drug to market specifically for cytokine storms. This first mover status will greatly benefit the company in winning mindshare from doctors. And cytokine storm is a huge market opportunity -- quite a bit larger than a $1 billion valuation. COVID-19 alone could send this stock a lot higher. But the opportunity for treating cytokine storm is much bigger than a single disease.