Shares of Prometheus Biosciences (RXDX) nearly tripled on Wednesday, Dec. 7, 2022. Investors were cheering for some surprisingly good news regarding the clinical-stage biotechnology company's lead candidate.

Prometheus Biosciences' stock price rocketed higher thanks to signs that suggest its lead candidate, called PRA023, could become a new blockbuster drug with billions in annual sales. Of course, forward-looking investors want to know if the stock can continue climbing in 2023 and beyond. Here's what everyone should know about Prometheus and its road ahead.

Reasons to buy Prometheus Biosciences now

Prometheus stock recently exploded higher in response to results from phase-2 trials involving two types of inflammatory bowel disease. A stunning 26.5% of ulcerative colitis patients treated with PRA023 achieved clinical remission compared to just 1.5% of those who received a placebo.

In a separate single-arm, phase-2 trial with Crohn's disease patients, a surprising 49.1% achieved clinical remission. This study didn't include a placebo group, but this remission rate is more than triple the expected rate based on historical data.  

There are several treatments for inflammatory bowel disorders that generate billions in annual sales, but none of them work along the same lines as PRA023. As a first-in-class drug for a relatively large population of long-term patients, sales of PRA023 could go on to pass the $1 billion mark within a few short years of earning approval from the U.S. Food and Drug Administration (FDA).

Reasons to remain cautious

Prometheus' lead candidate is designed to block tumor necrosis factor-like ligand 1A (TL1A). Unfortunately for Prometheus, it isn't the only company developing a TL1A drug for inflammatory bowel disorders. The biopharma behemoth, Pfizer (PFE 0.66%), is developing a similar candidate called RVT-3101 that is in a 250-person study.

Pfizer hasn't presented the results yet, but management said the induction period of its 250-person study was successful and that data from the trial's maintenance period would be available by the end of 2022. This summer, the generic drug giant, Teva Pharmaceuticals (TEVA -0.95%), threw its hat in the TL1A ring by beginning a 280-patient phase-2 trial with a candidate tentatively named TEV-48574.

Investors new to the wacky world of drug development should understand that Prometheus is a clinical-stage company that will burn through cash until one of its candidates, most likely PRA023, earns approval. After losing $103 million in the first nine months of the year, Prometheus finished September with just $260 million in cash and short-term investments.

Expenses related to development rise exponentially as new drug candidates approach the finish line. In 2023, Prometheus will begin large phase-3 studies to confirm the results seen in phase 2. Increased development expenses will quickly exhaust the company's cash supply and more than likely force it to sell more shares of its own stock to fund operations.

Person working in a biotechnology laboratory.

Image source: Getty Images.

A buy now?

Biotech stock prices generally hover at mid-single-digit multiples of total sales. At recent prices, Prometheus sports a $4.0 billion market cap that already assumes a great deal of commercial success for PRA023. With expectations this high, the slightest whiff of trouble could lead to severe stock market beatdowns.

Prometheus hasn't even started phase-3 testing of its lead candidate. This means it will be over a year before the company has the data it needs to assemble a viable application package for the U.S. FDA. There's still a lot that can go wrong before this company has a chance to generate any revenue. 

Many of the top-selling drugs of all time are treatments for chronic inflammation-related disorders. The data we've seen so far for PRA023 suggests it could become the next big blockbuster in this space. This stock is probably worth the significant risks it presents, but investors may want to make any investment in this company a small part of a much larger portfolio.