For a small-cap stock, getting approval from the Food and Drug administration (FDA) for a drug can be the game changer that sends its value soaring. One stock investors should be watching closely right now is Travere Therapeutics (TVTX -1.23%). At a valuation of only $1.4 billion, it's a modestly sized healthcare company. But the FDA recently green-lighted one of its treatments, and here's why it could make the stock a red-hot buy.

Filspari could generate hundreds of millions in revenue

In February, the FDA granted accelerated approval for Filspari, which treats IgA nephropathy (also known as Berger's disease), a type of chronic kidney disease. According to an analyst at Jefferies, this year the drug may bring in $35 million in revenue. But at its peak, it could hit $745 million in the U.S. market. For a company that reported $212 million in revenue for 2022, it's easy to see how this has the potential to transform the business and significantly accelerate Travere's growth rate.

On learning the news of the accelerated approval, multiple analysts boosted their price targets for Travere's stock, with some setting prices of $40 and higher. The current consensus analyst price target is at $33.20, which is nearly 50% higher from where the healthcare stock trades at today. Price targets normally look at where a stock might be in the next 12 to 18 months. 

Why hasn't the stock taken off already?

There are a couple of reasons Travere's stock isn't surging despite this encouraging news and analyst upgrades. For one, there are many people who are shorting it:

TVTX Percent of Float Short Chart

TVTX Percent of Float Short data by YCharts

When there's such a high short interest, that can make it difficult for a stock to rise in value as bearish investors are putting downward pressure on the price. But on the flip side, it also means there could be the potential for a short squeeze down the road. 

Another reason for some apprehension is that Filspari has a boxed warning for both birth defects and liver inflammation. Patients will need to check their liver toxicity levels before being able to begin treatment. It may take some time to see how much of an impact those warnings have on prescriptions, and so there is some risk there.

But given that the disease the drug treats is serious and can lead to kidney failure, I would be surprised if those warnings would be enough to derail its potential.

It could help the company get closer to profitability

Travere isn't a profitable company and in preparation for the launch of Filspari, it has added staff and incurred greater costs. In 2022, its operating expenses totaled $479 million and were more than double the $212 million in revenue that it reported for the year.

Currently, the company's top line comes predominately from the sale of its bile acid and tiopronin products. The former helps lower cholesterol levels while the latter prevent kidney stones. But revenue was underwhelming last year, declining 7% from the $227 million Travere reported in 2021.

The company needs Filspari to come through and generate significant sales for its operations to have a chance of becoming profitable. And should that happen, Travere becomes a much more tenable investment to consider.

Should you invest in Travere's stock today?

Shares of Travere have been rising of late but they are still near their 52-week low of $17.82. The stock is down 15% over the past 12 months, which is worse than the S&P 500's decline of 9% over that time frame. If you're willing to take on some risk, this could be a good healthcare stock to buy right now and hold for the long term given the potential upside that it has thanks to the accelerated approval of Filspari.