1 Green Flag and 1 Red Flag for Provention Bio

Things can change quickly in the volatile biotech industry. Just ask Provention Bio (NASDAQ: PRVB). The autoimmune disease-focused drugmaker seemed on the verge of earning a major regulatory approval for its leading candidate, teplizumab, in early 2021. However, because of regulatory roadblocks, the drugmaker has yet to win the green light from regulators for this therapy.

The headwinds related to teplizumab have played a critical role in Provention Bio's poor performance over the past 18 months, but could the biotech turn the tide? Let's consider one reason Provention Bio's stock could soar relatively soon and one reason to worry.

PRVB Chart.

PRVB data by YCharts.

Green flag: Provention Bio could be undervalued

With a market cap of $391 million -- and a share price of $4.80 as of this writing -- Provention Bio is squarely within small-cap and penny stock territory. However, one could argue that the market is valuing Provention Bio's teplizumab for next to nothing. Provention Bio is seeking approval for teplizumab to delay the onset of type 1 diabetes (T1D) in at-risk patients.

True, the U.S. Food and Drug Administration (FDA) declined to approve it last year, but that was due to manufacturing issues. Teplizumab's safety and efficacy did not seem to pose any problems. The therapy was very successful in clinical trials.

In one study, a 14-day course of teplizumab delayed the onset of T1D by a median of almost three years compared to a placebo. Teplizumab could earn regulatory approval relatively soon. Provention Bio should hear back from the FDA by Nov. 17. The approval of teplizumab would help Provention Bio's stock start moving in the right direction.

The company estimates that there are 30,000 patients who are direct familial relatives of those with T1D and are at risk of developing the disease. Further, there is currently no way to prevent or delay the onset of T1D, and of course, it is a chronic illness that imposes a severe burden on patients and the entire healthcare sector. That's why teplizumab could be successful and help Provention Bio turn things around.

And that's before considering potential label expansions for its leading candidate and other programs. Provention Bio is also developing teplizumab as a treatment for T1D in newly diagnosed patients. The biotech is running a phase 3 study to that effect. Elsewhere, Provention Bio boasts several other candidates, including a vaccine that could prevent up to 50% of T1D cases.

It's far too early to declare victory for any of these programs, but Provention Bio's pipeline looks promising overall.

Red flag: Plenty of risk involved

Provention Bio's upside could be solid, especially from its current levels, but only if it avoids clinical and regulatory roadblocks. The uncertainty surrounding these steps is what makes the company's stock risky. Smaller biotechs are especially prone to wild price swings on negative news, which makes sense. Many do not generate much (if any) revenue and are consistently unprofitable. That's the case with Provention Bio.

If the biotech fails to earn approval for teplizumab, its shares will plunge. Also, the company could suffer the same fate if its ongoing phase 3 study for teplizumab in treating T1D in newly diagnosed patients fails to impress investors. Funding could be an issue, too, as it is so often with small-cap biotechs. The company ended the second quarter with $96.1 million in cash and cash equivalents.

In addition, it completed a private stock placement in July, during which it raised net proceeds of $57.2 million. Management believes that this money is enough to keep operations going for at least the next year. But that's before accounting for the potential approval of teplizumab and the marketing efforts that would follow.

If Provention Bio is lucky enough to earn the green light for its leading candidate -- and if its share price soars as a result -- expect the company to conduct a secondary offering of common stock to raise additional funds. That's a favorite move of smaller biotechs. Of course, the move would almost certainly send Provention Bio's stock back down. Investors should take these likely developments into account before jumping in.

Is Provention Bio a buy?

Provention Bio looks like a high-risk, high-reward play. The company's upside could be massive if it earns approval and, later, label expansions for teplizumab. That's especially the case provided Provention Bio's other programs are also successful. But it's never the case that everything goes right for every company. Provention Bio will run into at least one issue. Depending on what wall it runs into, the downside could be massive.

Another roadblock Provention Bio could encounter is competition, as other companies, including Vertex Pharmaceuticals, are targeting the diabetes market. Investors comfortable with risk and volatility could consider initiating a small position in the biotech. But for risk-off investors, there are other biotech stocks to buy.

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Prosper Junior Bakiny has positions in Provention Bio Inc and Vertex Pharmaceuticals. The Motley Fool has positions in and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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