Companies with multibagger potential can be hard to find in the stock market, and some might be tempted to turn to Wall Street analysts for ideas and inspiration. That's not necessarily a bad move. But investors should always do their due diligence before pressing the buy button, regardless of the opinion of experts.
With that in mind, let's consider one company the Street is bullish on right now: small-cap biotech Provention Bio (PRVB). This drugmaker's shares could soar by almost 300% if it hits Wall Street's average price target of $16.42. Does Provention Bio have what it takes? Let's dig in.
A promising product
Smaller biotechs are often highly focused on a particular therapeutic area or a specific method of developing therapies. Provention Bio's mission is to tackle autoimmune diseases by finding ways to prevent or delay their onset. One of the company's first targets is type 1 diabetes (T1D). Provention Bio's teplizumab has delivered solid results from clinical trials in at-risk T1D patients.
In one study, the therapy was shown to delay insulin dependence in at-risk T1D individuals by a median of almost three years. That's pretty impressive, and T1D could have a solid target market if it were to get approved. Provention Bio estimates that up to 2.3 million people in the world may be at risk of developing T1D. That includes direct relatives of existing patients since genetic factors and familial history can increase the risk of developing T1D.
However, teplizumab has encountered regulatory roadblocks. In July 2021, the U.S. Food and Drug Administration (FDA) raised issues related to differences in manufacturing between the version of teplizumab Provention Bio used in clinical trials and the version of the therapy it wants to market.
The agency declined to approve the medicine although it did not raise safety or efficacy concerns. Provention Bio addressed the problems raised by the FDA and resubmitted an application for teplizumab in February. The company should have an answer by Nov. 17. Even if there are more twists and turns in this story, teplizumab is likely to earn the green light eventually given that it produced such solid data in clinical trials and the fact that it seems to have a reasonable safety profile.
High risk, high reward
Provention Bio is also looking to develop teplizumab to treat T1D in newly diagnosed patients. The company is currently running clinical trials to that effect, although the therapy still has a long way to go to earn that indication. Provention Bio has other products in the pipeline, including potential medicines to delay systemic lupus erythematosus and celiac disease. Provention Bio currently sports a measly market cap of $255 million.
In my view, teplizumab will return several times this amount of money over the years if it is approved to delay T1D. That's before adding the medicine's potential in other indications and other products Provention Bio is developing. In short, one could argue that Provention Bio is undervalued and that a substantial increase in its stock price of the kind Wall Street is imagining isn't that unlikely.
But it's essential to consider the risks associated with this biotech, too. First, as a clinical-stage company, it currently generates little revenue, and it is consistently unprofitable. No matter how promising a therapy is, funds can be hard to come by for clinical-stage biotechs. Provention Bio had $113.4 million in cash and cash equivalents as of the end of the first quarter.
The biotech recently raised an additional $60 million through a private placement. The company's current cash situation seems sufficient until the FDA gets back with an answer on teplizumab. If the therapy earns the green light, Provention Bio may need to raise additional funds to cover commercialization efforts. The company may well resort to dilutive financing within the next six months, which investors should keep in mind.
Second, Provention Bio could run into more regulatory problems, or its products could fail to hit the mark in clinical trials. Third, Provention Bio isn't the only company targeting T1D. Biotech giant Vertex Pharmaceuticals is currently developing a treatment for this chronic health condition. All of these factors make Provention Bio a risky bet.
Even if things go according to plan within the next year, I do not foresee its shares rising by nearly 300% within a year. But Provention Bio could have a promising future if it can execute its master plan. Only investors comfortable with heightened risk and volatility should tread these waters. For others, there are safer and much more promising biotech stocks on the market.