The biotech sector is extremely disruptive and provides many opportunities for those investors with a high risk appetite. Several scientists believe that humankind is in the golden age of biotechnology, given that scientific advances have created new ways to treat and prevent diseases.
Here’s a closer look at one biotech stock that trades under $10 and, according to Wall Street, could surge 400%.
An Overview of Compass Pathways Stock
Valued at $544 million, Compass Pathways (CMPS) is a mental healthcare company with a presence in the U.S. and the United Kingdom. It develops COMP360, a psilocybin therapy that is in Phase III clinical trials, to treat depression. Further, it is also developing treatments for post-traumatic stress disorder (PTSD) and anorexia nervosa.
CMPS stock is down about 84% from its all-time highs, set in November 2021. In 2024 alone, Compass stock has shed 11%, despite a roughly 28% rally this month.
Like most low-dollar biotech stocks, CMPS is best reserved for investors with a healthy appetite for volatility and a higher tolerance for risk.
What's Behind Recent Volatility in CMPS Stock?
Last month, several psychedelic stocks, including CMPS, traded lower after the Food and Drug Administration’s (FDA) non-binding committee rejected the commercialization of a Lykos Therapeutics drug.
Lykos is a public benefit corporation, and recently published phase 3 clinical trial results showing that a combination of MDMA and psychological support could be used to treat severe cases of PTSD.
As the trial results were promising, Lykos filed a petition with the FDA to commercialize the drug. However, the FDA rejected the application, and a binding committee will soon deliver the final verdict regarding the approval.
RBC Capital is Bullish on Compass Pathways
RBC Capital Markets (RY), a leading investment bank, recently initiated coverage on Compass Pathways with an “outperform” rating and a target price of $23. This forecast indicates an expected upside potential of almost 200% from current levels.
In a note to clients, RBC said it believes the company's pipeline of psychedelic-powered medications looks promising for the treatment of mental illnesses. Moreover, stocks in the psychedelic therapy niche have cooled off in the past two months, providing investors with a buying opportunity.
According to RBC Capital Markets, Compass has a lead program called COMP360, which is derived from psilocybin and used to treat depression. The biotech company is on track to release top-line data from its phase clinical trial in Q4 of 2024.
RBC analyst Leonid Timashev added that Compass Pathways has conducted its own studies, which “have confirmed the efficacy of 25 mg psilocybin with a highly meaningful ~7 pt MADRS change over a 1 mg inactive control dose, and showing dose dependent efficacy as well; further, the drug has also reproduced the efficacy in both monotherapy and adjunctive settings.”
Finally, RBC forecasts that COMP360 could bring in $1 billion in peak sales if it is approved for the treatment of depression. That potential for peak sales is even higher, at $2.9 billion, when considered for other treatments and regions.
Is Compass Pathways Stock a Good Buy?
Out of the nine analysts covering Compass Pathways, eight recommend “strong buy,” and one recommends “moderate buy.” The average 12-month target price for CMPS stock is $40.50, over 420% higher than the current trading price.
Compass Pathways remains a high-risk investment, given the slim chance for regulators to approve psychedelic treatments.
That said, Compass ended Q1 with $263 million in cash, while its operating expenses in the last 12 months totaled $132 million. This indicates the company has enough liquidity to complete its phase 3 trials and support its cash burn rates in the near term.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
