Wall Street analysts love to prophesize, but they're typically right no more often than the average investor. Nonetheless, when Wall Street initiates coverage on a stock, issues an upgrade or downgrade, or assigns a price target to a company, the stock in question typically moves up or down in corresponding fashion.
Here at The Motley Fool we discourage getting caught up in the very short-term moves associated with analyst ratings. However, it's never a bad idea to look into the reasoning behind why a stock is rated as the equivalent of a "buy" or "sell," or why a price target was assigned, because it could be meaningful for your long-term investing thesis.
Wall Street believes these small-cap biotech stocks could triple
With that in mind, I thought we'd peer into one of investors' favorite (and most volatile) sectors, biotechnology, and examine three small-cap stocks that are currently poised to triple -- at least based on Wall Street's mean price target estimates. With this figure in mind, we'll briefly examine whether or not Wall Street is being too optimistic, or if its lofty projections could be just right under the right scenario.
Threshold Pharmaceuticals (NASDAQ: THLD)
First up we have wholly clinical-stage biotech company Threshold Pharmaceuticals. With a mean price target of $13.25, Wall Street is essentially projecting a tripling of its share price.
Wall Street's wildly optimistic projections could potentially bear fruit, as Threshold's a truly unique company in the cancer care space. Whereas most cancer drug developers have chosen to approach cancer care through traditional means (blocking blood vessel formation, for example), Threshold's lead product, evofosfamide (formerly TH-302), is a novel cancer agent targeted at tumor hypoxia.
What's tumor hypoxia? When tumors grow, they often outpace blood vessel growth, leaving certain areas of the tumor starved for oxygen, or hypoxic. Evofosfamide is a drug designed to target these areas of low oxygen presented by tumors (hypoxia is rare among normal cell growth) and attack them. Ultimately, Threshold's approach could work with multiple types of solid tumors, and presents an option that more precisely attacks the tumor rather than healthy cells.
The danger with Threshold is that the majority of its pipeline is tied to the success of evofosfamide. There are seven ongoing studies involving evofosfamide, including a phase 3 in pancreatic cancer (the MAESTRO trial) and soft tissue sarcoma, compared to just two midstage studies involving its other cancer therapeutic, tarloxotinib (previously TH-4000). If MAESTRO or the soft tissue sarcoma trial fail to hit the mark, investors are going to pounce on Threshold, as that could throw its remaining pipeline into question. But the flipside could be true too, in that success in MAESTRO or soft tissue sarcoma could validate Threshold's research and open it up to licensing deals or even a buyout.
It's tough to say which way Threshold will swing considering its heavy reliance on a single experimental drug, but it's nonetheless a story stock worth keeping an eye on.
Inovio Pharmaceuticals (NASDAQ:INO)
Keeping with the theme, clinical-stage, small-cap, predominantly cancer-focused Inovio Pharmaceuticals has a mean price target on Wall Street of $22, yet its stock currently resides around $7 per share.
What makes Inovio such an attractive long-term play is its focus on cancer immunotherapies. Immuno-oncology vaccines are therapies designed to enhance the ability of your immune system to locate and fight cancer, and they are arguably the most exciting new area of cancer research.
Inovio currently has a pipeline comprised of five experimental cancer therapies and a little more than a half-dozen infectious disease vaccines in development. Although HIV, Ebola, and hepatitis B could be substantial players for Inovio down the road, Inovio's management team has left no room for doubt about its identity as a cancer care company first, and an infectious disease player second.
Working in Inovio's favor have been its favorable clinical results for lead cancer vaccine VGX-3100 and its ability to land big-name partners. In a phase 2 study, VGX-3100 demonstrated a statistically significant improvement in disease regression for patients with cervical dysplasia associated with human papillomavirus types 16 or 18. A success in phase 3 would go a long way toward validating Inovio's immunotherapy research platform.
Additionally, Inovio has secured a collaboration for INO-3112 with MedImmune, which is in early stage trials for cervical cancers and head and neck cancers caused by HPV types 16 or 18, and Roche for INO-1800, an experimental hepatitis B vaccine. Landing big-name companies is an encouraging sign.
The potential downside for Inovio is that it's still a largely unproven platform that's going to take years to develop into a mature portfolio. This means Inovio is likely to lose money for years to come, and it could turn to the open market from time to time to raise cash by selling stock, which may have a negative effect on shareholders since it dilutes their existing shares. Personally, I'll need to see concrete late-stage data before I believe that Inovio could leave the station and meet Wall Street's lofty price target.
Synta Pharmaceuticals (NASDAQ: SNTA)
One of the largest differentials between Wall Street's expectations and a stocks' current price is found at Synta Pharmaceuticals. Sytna's current share price, which is hovering around $2, pales in comparison to the $11.33 mean estimate from Wall Street analysts. In other words, we're talking about the potential for more than 450% upside if Wall Street is right about Synta (keyword, "if").
Like the others, Synta Pharmaceuticals is a clinical-stage biotech company focused on developing cancer care therapies. The vast majority of its pipeline revolves around ganetespib, a small molecule inhibitor of heat shock protein 90 (Hsp90). Research has appeared to demonstrate that cancer cells are more reliant on Hsp90 than normal cells, meaning inhibition of this protein could alter cancer cell growth, differentiation, or survival. There aren't many drug developers targeting Hsp90, so this could be the differentiating factor that puts Synta on the map.
Synta has also already reported positive results for ganetespib as a second-line treatment for non-small cell lung cancer in the phase 2 GALAXY-1 trial. In patients with advanced disease, the combination of ganestespib and docetaxel led to median progression-free survival of 5.4 months and a median overall survival of 10.7 months. By comparison, the docetaxel monotherapy arm led to progression-free survival of 3.4 months and median overall survival of 6.4 months.
The main concern that investors should be aware of is that Synta's pipeline is pretty much entirely on ganetespib's back. Aside from two preclinical studies, Synta's seven ongoing or initiating clinical studies across four cancer indications are all examining ganetespib. If GALAXY-2, the phase 3 portion of Synta's second-line NSCLC study, fails to hit the mark, it could cast doubt on Synta's entire pipeline. The gamble here is very real for Synta and investors, but at least the catalyst that everyone is waiting for is right around the corner: GALAXY-2 is expected to have top-line data available sometime between the second half of this year and the end of 2016.
Much like Inovio, I'd rather wait for Synta's late-stage results before placing my bet.