Biotech companies, especially small-cap ones, often have explosive growth potential. But that almost always comes with significant risks. Before investing in a small-cap biotech, it's essential to ensure there is more to it than exciting potential short-term gains.
Let's look at one biotech company Wall Street thinks could skyrocket: bluebird bio (BLUE -6.42%). This gene-editing specialist has an average price target of $6.64, according to Yahoo! Finance, which implies an upside of 89% for the stock, as of this writing. Can Bluebird pull this off in the next year? Let's find out.
Bluebird's current market opportunity
Bluebird currently has two products on the market. The first is Zynteglo, a treatment for transfusion-dependent beta-thalassemia (TDT), a rare blood disorder. The second is Skysona, a therapy that targets cerebral adrenoleukodystrophy (CALD), a rare pediatric neurological disorder. On the surface, it seems that Bluebird should be doing better than it has been.
These two gene-editing therapies address illnesses that have largely evaded researchers. For instance, current standards of care for TDT (before Zynteglo) do not rid patients of their disease. Many patients critically depend on regular blood transfusions. Zynteglo is a onetime curative option, although one that costs $2.8 million.
That's a hefty price tag. But considering the otherwise heavy burden that patients with TDT have to carry, it doesn't seem that unfair. Bluebird estimates a total population of at most 1,540 people in the U.S. who could benefit from Zynteglo and Skysona, including 1,500 with TDT and just 40 with CALD. Skysona costs $3 million, so in total, the biotech is looking at a market opportunity of $4.32 billion.
Spread across the next five years, that amounts to about $864 million annually. Administering Zynteglo and Skysona is a long and arduous process, and this analysis assumes Bluebird will capture the entire market, a doubtful assumption considering that other companies are trying to eat its lunch. Vertex Pharmaceuticals and CRISPR Therapeutics are close to earning approval for exa-cel, a competing TDT treatment.
With all that going on, Bluebird's current market cap of just $407 million makes more sense.
A potential significant catalyst is on the way
Bluebird recently completed a regulatory application for lovo-cel, a gene-editing therapy for sickle cell disease (SCD), also a rare blood-related illness. The Food and Drug Administration (FDA) should make a decision to approve it or not by Dec. 20. But the company's opportunity here is exponentially larger than with Zynteglo and Skysona.
Bluebird estimates that there are about 20,000 patients eligible for lovo-cel in the U.S. A recent analysis concluded that a price in the range of about $2 million would be fair for lovo-cel, so Bluebird could be looking at a $40 billion opportunity.
However, lovo-cel shares many of the same risks Zynteglo and Skysona have: potential competition from exa-cel, which is also an SCD treatment, and the fact that it is a complex gene-editing treatment and not just a pill patients can take in the comfort of their homes.
And at some point, the FDA placed lovo-cel in a clinical hold while it investigated whether a severe adverse reaction during one of Bluebird's clinical trials was due to the therapy.
Lovo-cel was eventually cleared, but once a treatment is even remotely thought to cause severe adverse events, it could get hard to shake that suspicion completely, even if there is no concrete evidence of a causal effect.
Perhaps the market still isn't convinced that the FDA will grant lovo-cel the green light (these things are never certain), but if it does, Bluebird's shares could soar.
Are Wall Street's predictions too optimistic?
Bluebird certainly does have substantial upside potential. If the company can get lovo-cel through its final regulatory obstacle without a hitch and grab even a small 20% share of the total market it is going after across Zynteglo, Skysona, and lovo-cel through the next five years, the company's shares will perform well. But any hiccup could send shares falling off a cliff.
In my view, Bluebird's shares are somewhat likely to hit $6.64 in the next year, if only because positive regulatory developments can often lead to substantial gains for small-cap biotechs. However, the company's long-term prospects are highly risky and unpredictable. So, most investors would do well to stay away and opt for safer biotech stocks.
But for those comfortable with plenty of risk and volatility, Bluebird could be a great contrarian buy.