Investors with a long-term investment horizon often choose growth stocks. In the simplest terms, growth stocks are companies that are expected to grow at a faster rate than the market or industry peers.
These companies often operate in burgeoning sectors or offer innovative products and services that have the potential to capture a significant market share. Investors are drawn to them because of the anticipation of substantial revenue and earnings growth over time.
One such name is clinical-stage biotech company Biomea Fusion (BMEA), whose commitment to discovering cutting-edge therapies to treat patients grappling with challenging diseases has piqued Wall Street's interest. Biomea shares surged 71% last year, outpacing the S&P 500 Index’s ($SPX) gain of 25%.
Wall Street rates the stock a “strong buy” with an average target price of $49.43, which implies a potential upside of 190% by the end of 2024. Meanwhile, its high target price implies the stock can skyrocket by an eye-catching 428% in the next 12 months.
Is this a realistic target? Notably, biotech stocks have the potential to soar with even one blockbuster drug on the market. So, let’s find out what makes Wall Street so optimistic about Biomea Fusion stock.
What Does Biomea Fusion Do?
With a market cap of $584 million, Biomea Fusion is a small-cap, evolving biopharmaceutical company. Its core focus revolves around targeted protein degradation (TPD) using its proprietary FUSION System.
This emerging approach has sparked interest in its potential to treat a wide array of life-threatening diseases. At its core, TPD involves the selective removal of disease-causing proteins using the body's natural protein recycling machinery. This targeted approach presents a new way to address previously undruggable targets and has the potential to tackle diseases ranging from cancer to neurodegenerative and metabolic disorders.
The company has yet to generate any revenue. In the most recent third quarter of 2023, the company reported a net loss of $28.4 million. Investors who choose to invest in clinical-stage biotech companies must be prepared to accept that the company will be unprofitable for several years until it has one or more successful drugs on the market.
Recently, the company shared efficacy data from the Phase 2 clinical trial of its lead candidate, BMF-219, an investigational diabetes therapy. The potential drug aims to “regenerate insulin-producing beta cells” to treat diabetes. According to the company, the trials showed promising blood glucose control in adults at Week 22. Additionally, Biomea noted that patients tolerated the drug well, with no severe adverse reactions during the trial.
Furthermore, BMF-219 (COVALENT-101) is also undergoing a separate Phase 1 clinical trial for acute myeloid leukemia (AML). If successful, BMF-219 will be the first and only experimental covalent oral menin inhibitor for AML.
Along with third-quarter results, Biomea also announced it dosed its first patient with its second candidate, BMF-500 (COVALENT-103) for acute leukemia. BMF-500 is a FLT3 oral covalent inhibitor created with the company's FUSION System.
These early preclinical and clinical studies showing promising results fuel optimism about the potential efficacy of Biomea treatments. If and when Biomea's candidates are approved and commercialized, the company's chances of collaborating with major pharmaceutical companies will improve, increasing its revenue potential.
However, there are a lot of “ifs.” As a result, investors should exercise caution before putting money into a growing company.
The Cash Situation
At the end of the quarter, Biomea had a debt-free balance sheet with $199.5 million in cash and cash equivalents. However, it also had a negative free cash flow of $77 million. It is not unusual for growing biotech companies to burn cash at a rapid rate.
Because Biomea is still in its early stages and is unprofitable, the company may need to raise funds by taking on debt or issuing new shares. Investors should watch out for this, as re-issuing shares increases the likelihood of diluting shareholders' stock.
The future holds immense promise for Biomea Fusion. As its research progresses and clinical trials advance, the company stands at the precipice of delivering transformative treatments that could significantly impact patient outcomes, leading the company to great success. This likely explains Wall Street's enthusiasm for Biomea stock.
What's Analysts’ Take on Biomea Fusion Stock?
Overall, Wall Street rates Biomea Fusion’s stock as a “strong buy.” Out of the 8 analysts that cover the stock, seven rate it a “strong buy” while one analyst recommends a “hold.”
The average target price for BMEA is $49.43, which is 190% above current levels.
The Bottom Line
The biotechnology sector is highly dynamic and competitive, yet Biomea Fusion's innovative approach to curing life-threatening diseases positions it favorably in this race to deliver ground-breaking therapies. The company's commitment to scientific rigor, coupled with its ability to adapt and innovate, bodes well for its growth prospects in the coming years.
As I previously stated, biotech stocks can skyrocket with just a few successful drugs on the market. Furthermore, if these drugs prove successful, the consistent demand could generate revenue and earnings for the company for many years.
While the Street-high target price for BMEA appears to be unrealistic by the end of 2024, I believe the average target price of $49.43, which implies a 190% upside, is achievable. That said, note that biotech stocks are significantly risky, as clinical trials may fail or potential candidates may not receive approvals. That's why it's prudent to diversify your portfolio with a few stable stocks.
On the date of publication, Sushree Mohanty 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.
