Investing in small-cap, clinical-stage biotech stocks can be a double-edged sword. While shares of these companies can skyrocket following positive clinical or regulatory news, they can just as quickly lose a substantial amount of their value in a short period if things don't go their way.
In other words, jumping into these waters is a risky proposition, but you have above-average risk tolerance, it can turn out to be a lucrative move. With that in mind, let's turn to two biotech stocks that could soar (and provide above-average returns to patient investors): Krystal Biotech (KRYS -1.85%) and Editas Medicine (EDIT -2.02%).
1. Krystal Biotech
Krystal Biotech develops gene-editing therapies for rare skin diseases. Gene editing refers to a set of techniques that allows scientists to manipulate an organism's DNA, a technology that is helping researchers expand the group of illnesses considered treatable. Last year, Krystal Biotech announced positive data from a phase 3 clinical trial for one of its leading pipeline candidates, Vyjuvek.
The study enrolled 31 patients with dystrophic epidermolysis bullosa (DEB). This condition causes the skin to be very fragile. Patients with DEB can suffer blisters or injuries from doing things others would consider mundane, such as lightly scratching the skin. Furthermore, those with DEB have an elevated risk of squamous cell carcinoma, a form of skin cancer.
During Krystal Biotech's pivotal study, 71% of wounds in DEB patients treated with Vyjuvek achieved complete wound healing three months after the treatment, compared to only 20% of injuries treated with a placebo. Vyjuvek didn't cause any severe adverse reactions.
These results are impressive, and it's no wonder that the market reacted by sending Krystal Biotech's shares much higher after it released the data.
Image source: Getty Images.
The company said it would file a Biologics License Application (BLA) with the U.S. Food and Drug Administration (FDA) during the first half of 2022. Once it announces this development, the market could once again reward its shares by sending them higher. But the most crucial thing is Vyjuvek's addressable market. Krystal Biotech estimates that there are about 3,000 patients in the U.S. diagnosed with DEB, and about 9,000 worldwide.
According to the company, these patients spend between $200,000 and $400,000 per year on various treatments that aren't disease-modifying. In other words, there's a serious need for new therapy options. Even with a modest patient population of 3,000, Vyjuvek could reach blockbuster status, depending on its price tag.
And based on the fact that it's a gene therapy (which are generally complex to administer) -- not to mention the amount of money DEB patients typically spend on this illness -- you can reasonably assume that Vyjuvek will come with a hefty price tag. If the therapy earns approval from regulators, which could happen within the next 18 months, the market will reward Krystal Biotech and its shareholders.
There are risks involved, naturally. Krystal Biotech currently has no products on the market and is unprofitable. The company could also run into unforeseen clinical or regulatory issues, a risk companies in the biotech industry always have to deal with. That's why if you're interested in investing, you should limit yourself to a small position. But if all goes according to plan for this biotech company, its shares could explode in the next couple of years.
2. Editas Medicine
Editas Medicine is another clinical-stage biotech that develops gene-editing therapies. The company is targeting a range of serious and rare diseases with its investigational treatments. In addition, Editas Medicine is currently advancing a gene-editing technology called SLEEK, which it says could "enable the development of next generation cell therapeutics for cancer and other serious diseases."
The biotech's clinical programs include EDIT-301, a potential therapy both for severe sickle cell disease (SCD) and for transfusion-dependent beta-thalassemia (TDT), a rare blood-related disease. In December, Editas Medicine got the green light from regulators to start a phase 1/2 clinical trial for EDIT-301 in TDT.
Perhaps the company's most advanced candidate is EDIT-101, an investigational in vivo (inside the body) therapy for Leber congenital amaurosis 10 (LCA10), a rare genetic eye disorder. LCA10 causes poor vision and often blindness, and it is typically diagnosed in patients at a very young age.
Image source: Getty Images.
In September, Editas Medicine reported mixed results from an ongoing phase 1/2 clinical trial of EDIT-101. While the therapy is proving safe and effective in the study, only those patients in the mid-dose cohort of the trial (composed of three patients) seem to be showing any improvement in their disease. The company did not report improvement for the two patients in the low-dose cohort.
But Editas Medicine is also dosing more patients in a high-dose cohort, so it's best to wait for more data to come in, which should happen sometime this year. If EDIT-101 proves effective and ends up earning approval, Editas Medicine could be looking at an addressable patient population of 4,000 people in the U.S. and Europe, and about 30,000 people elsewhere.
You can also expect EDIT-101 to command a steep price if approved. Like Krystal Biotech, Editas Medicine is unprofitable, and it could run into clinical or regulatory headwinds; keep this in mind as these factors make the biotech riskier than average. The company has fallen along with the broader market lately. But if its master plan actualizes, Editas Medicine's shares could skyrocket.
