Investing in small-cap stocks comes with inherent risks. These stocks are, after all, fairly small in size because they are relatively unproven businesses. Often, they aren't profitable or even generating revenue, which can normally be the case when it comes to biotech stocks.
Vera Therapeutics (VERA 2.48%) is a biotech stock that falls into that category. With a market capitalization of roughly $600 million, the small-cap stock has a lot of potential to get bigger. According to the analyst consensus price target of $23.20, the stock could rise by as much as 70% based on where it trades at today.
Are analysts right about this stock? Is this a potential steal of a deal right now, or is there too much risk?
What has analysts so bullish on Vera?
Vera is a clinical stage biotech company, which means the company has no approved products it can sell today. That's generally par for the course for small biotech stocks. If and when one of their drug candidates obtains approval from the U.S. Food and Drug Administration, that's when shares of biotech companies can sometimes go parabolic. At least, that's what investors hope.
The hopes for Vera's stock center around a key asset that could provide the company with some promising growth opportunities: atacicept, a fusion protein which aims to reduce autoantibodies, which can cause to damage to human organs. The company is in the process of beginning phase 3 trials. Researchers are testing to see if it can be an effective treatment for Immunoglobulin A Nephropathy (IgAN), also known as Berger's disease, which is a kidney disorder. It happens when there is too much of the IgA protein in the kidneys. It's a rare but serious disease that can lead to kidney failure. The potential market opportunity for novel IgAN therapeutics could be worth up to $10 billion annually, based on U.S., European, and Japanese markets.
However, investors may not see the company generate any revenue from the drug for multiple years. Assuming all goes well, Vera expects that atacicept may launch by 2026.
The company touts a strong balance sheet
A key thing for biotech investors to always consider is how much cash a company has, and how well-funded its operations are. That's because if a company doesn't have much cash on its books, dilution could be a significant risk for investors.
Vera says that between its credit and available cash position, it has enough runway to fund its operations until early 2026 -- right around the time atacicept may potentially hit the markets. This is assuming, of course, that all goes well. As of the end of September, the company had just under $160 million in cash and marketable securities on its books. And over the past nine months, Vera has burned through $67 million in cash from its day-to-day operating activities.
As the company progresses through late-stage trials, its costs and cash burn could accelerate. Note that the company has needed to resort to stock offerings in the past, with its share count doubling in just two years.
VERA Shares Outstanding data by YCharts
The risk for investors is that if there's a hiccup along the way and results for atacicept's clinical trials prove to be underwhelming, that could send the share price down. And if Vera needs to issue shares, it will potentially need to issue more than it otherwise would at a higher price. For cash-burning businesses, there's the risk that things can quickly go from bad from worse, as a declining share price and a need for stock offerings can lead to a downward spiral for a stock.
While the company is confident that it has the liquidity it needs to get to 2026, investors should brace for the very real possibility that that won't turn out to be the case.
Should you invest in Vera Therapeutics?
Vera Therapeutics would be worth $1 billion if it hit the consensus analyst price target. That isn't an unreasonable valuation if the business does end up obtaining approval for atacicept. But the best-case scenario is still a couple of years away. And within the past 52 weeks, the stock has fluctuated wildly between a low of $5.20 and a high of $21.02.
For risk-averse investors and those who aren't comfortable with a potential roller-coaster ride, it's better to sit this investment opportunity out and pursue other growth stocks right now. Vera is far too risky a stock to take a chance on at this stage.
