From Aug. 11 through Sept. 15, shares of the troubled Canadian cannabis producer Canopy Growth (CGC 2.41%) rocketed 235% higher. Shares of clinical-stage drugmaer Taysha Gene Therapies (TSHA 3.91%) soared an even more impressive 345% over the same time frame.
Are there more eye-popping gains up ahead, or is it already too late to buy these volatile stocks? To find out, let's look at the catalysts that drove them higher.
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1. Canopy Growth
Investors cheered Canopy Growth's recent decision to cease funding its ill-fated dietary supplement business, BioSteel, to focus on selling cannabis and related products.
Top-line revenue from its dietary supplement business rocketed to CA$32.5 million (more than $24 million in U.S. dollars) in the fiscal first quarter from CA$13.7 million (more than $10 million USD) a year earlier, but this doesn't tell the whole story. The costs of producing and warehousing supplements were a lot higher than Canopy Growth was expecting, again. Before factoring in sales, general, and administrative expenses, the company lost CA$0.24 for every dollar of BioSteel revenue recorded in the first quarter.
BioSteel's fiscal first-quarter performance was nearly twice as damaging as the negative gross profit margin it reported in the prior-year period.
Canopy Growth was right to jettison its failing supplement business, but this still isn't a good time to buy the stock. Investors should know that BioSteel isn't the only operating segment with a negative gross margin.
Canopy Growth's main operating segment, selling cannabis in products Canada, lost CA$0.01 for every dollar of revenue it reported in the fiscal first quarter. That's a huge improvement over the negative 24% gross margin it reported a year earlier, but hardly a reason to ignore substantial doubt about the company's ability to continue as a going concern for another 12 months as stated in its latest earnings report.
Canopy Growth expects to achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of fiscal 2024. It's probably best to wait and see if it can meet this expectation before risking any of your hard-earned money on this super-risky stock.
Taysha Gene Therapies
Taysha Gene Therapies is a clinical-stage biotechnology company developing new gene therapies for inherited neurological conditions. The stock surged after the company reported early signs of success from a phase 1 trial with its experimental Rett syndrome treatment, TSHA-102.
The first Rett syndrome patient treated showed signs of improvement during a checkup conducted four weeks after receiving a single dose of TSHA-102. Rett syndrome is a neurodevelopmental disorder often caused by a mutated MECP2 gene. TSHA-102 contains a shortened version of this gene, and it appears to work as intended.
In addition to a lack of negative safety signals, the first patient to receive TSHA-102 reported improvement on several tests of disease severity. The trial's principal investigator also observed improvements in the patient's motor skills and vocalization abilities.
Despite its stock price more than quadrupling, expectations for Taysha Gene Therapies are still fairly low. Its market cap at recent prices is just $213 million.
Rett syndrome is rare, but it still affects roughly 350,000 people worldwide. In other words, there are more than enough addressable patients to drive annual sales of TSHA-102 past $300 million if it continues to impress.
Taysha Gene Therapies expects to dose a second patient with TSHA-102 in the third quarter. If subsequent results fall in line with the first patient's, the stock could rocket much higher than it already has.
While Taysha stock could jump again on positive results, gene therapy trials are often unpredictable. Any negative safety signal could lead regulators to pause the company's development plans and crush its stock price in the process.
Before taking a big risk on this biotech stock, investors should know that Taysha finished June with just $45 million in cash after burning through $124 million over the past 12 months. Some new financing will inject $150 million into its coffers, but it will also more than triple its number of outstanding shares.
Taysha's dilutive financing severely lowers long-term shareholders' chances of realizing future gains even though it only lengthens the company's cash runway until 2025. It's probably best to watch this stock from a safe distance until the company has a lot more clinical trial data to digest.
