This Biotech Stock Jumped Over 600% in Just Days After Releasing Promising Clinical Trial Data. And Its Market Cap Is Still Only $2 Billion. But Is It a Buy?

Key Points

• Shares of ProKidney surged last week after the company reported encouraging phase 2 trial data.

• Rilparencel is a cell therapy that could generate up to $900 million in revenue per year for the business.

• However, it could still be more than a year before phase 3 trial data comes out.

• 10 stocks we like better than ProKidney ›

Biotech stocks can be risky but exciting investments because they can soar quickly on positive news, such as a drug approval or simply the hope that they may soon have an approved treatment. They can drop just as quickly on negative news. One stock that has recently skyrocketed is ProKidney (NASDAQ: PROK).

At the start of the month, it was firmly in penny stock territory, with a price of less than $0.60. But as of the end of last week, it was up over $4.50, having taken off in value on some encouraging developments. And yet, even despite soaring well over 600% in less than a week, its market cap remains at around $2 billion as I write this.

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What's behind the healthcare stock's impressive rally, and should you consider investing in ProKidney today?

Image source: Getty Images.

The catalyst behind ProKidney's surge

On July 8, shares of ProKidney rose by 515%, and trading volumes also spiked, from 820,000 shares the previous day to more than 343 million. The reason for the bullishness is that the company released phase 2 trial results for rilparencel, a promising cell therapy it is developing as a treatment for chronic kidney disease (CKD) and diabetes.

There were no serious adverse events noted in the trial, and the data showed that the treatment has potential in helping preserve kidney function for people with CKD and diabetes.

At its peak, analysts believe that rilparencel could generate $900 million in annual revenue. That may put the company on a path toward profitability, but it's by no means a sure thing since it first needs to obtain approval. And phase 3 trial data, which often can determine a treatment's likelihood of approval, is still likely more than a year away. The stock has dropped a bit since the July 8 surge.

ProKidney is in good position to handle its ongoing cash burn

The name of the game for biotech companies that are in the midst of developing drugs and treatments is to keep their costs down as low as possible, and to minimize the need for cash infusions. With minimal revenue, ProKidney is a cash-burning machine right now, and its expenses may rise, especially as it progresses in later-stage trials, which are larger and more costly to run.

Through the first three months of the year, the company used up just under $30 million in cash for its day-to-day operating activities. The good news is that with cash and marketable securities totaling $328 million, the business appears to be well funded and in good shape to continue investing in its research and development without needing to issue shares anytime soon. Given its current resources, it has some runway.

Is ProKidney stock a buy?

Shares are up big of late, but a few years ago ProKidney reached highs of over $13 per share. (It closed Tuesday at $3.37.) Biotech stocks can go on roller-coaster rides as they struggle with burning cash. And while encouraging clinical trial results can have positive effects, they may not be enough reason for a stock's value to remain high.

In the case of ProKidney, until and unless rilparencel obtains approval from regulators, this is going to remain a risky and volatile stock. And given its recent surge, some investors may be tempted to cash out on the excitement, especially since there's still plenty of risk.

At a near $2 billion valuation, I would hold off on buying the stock right now since there could still be a lot of room for it to fall back down. The phase 2 results may have been encouraging, but that doesn't guarantee that phase 3 will also be positive and that approval for rilparencel is inevitable.

It could still be a long road ahead for ProKidney before it proves to be a good growth stock. Unless you have a high risk tolerance, you may be better off simply waiting on the sidelines.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.