Small-cap stocks can have exciting potential. At low valuations, there may be much more upside for investors than there can be for large tech stocks with market caps in excess of $1 trillion. One red-hot stock of late has been Mind Medicine (NASDAQ: MNMD). Shares of the psychedelic biotech company have jumped by close to 140% already this year. Here's why there may be room for the stock to rise even higher.
Promising results from a clinical trial have given investors reason for hope
Investors have been bullish on Mind Medicine recently because the company has released positive results relating to MM120 (its LSD-based treatment), which has shown effectiveness in reducing anxiety in patients. What's particularly promising is that only a single dose was used without any additional therapeutic intervention.
A comparable drug from Johnson & Johnson, Spravato, normally requires multiple treatments for the first four weeks, which gradually comes down afterward. MM120 has the potential to be a much more efficient treatment, which can result in better outcomes and fewer side effects for patients.
Given the potential for MM120, the Food and Drug Administration (FDA) granted it breakthrough therapy designation as a treatment for generalized anxiety disorder. The designation can help speed up the time that a drug comes to market.
Why the stock could go higher
Mind Medicine is moving forward with plans to initiate a phase 3 clinical program involving MM120 in the latter half of this year. It is also meeting with the FDA to discuss its phase 2 results. Any positive news relating to its discussions with the FDA or progress in its phase 3 trials could generate more bullishness and excitement behind the business and its prospects for long-term growth. A big reason for that is that Mind Medicine could establish itself fairly early on as a top psychedelics company.
The market for psychedelic drugs is still fairly small and has some regulatory hurdles. According to analyst estimates from Grand View Research, the global psychedelic drug market was worth roughly $1.6 billion in 2022. But it is growing at a compounded annual growth rate of more than 12%. It's an exciting growth opportunity in the healthcare industry. And given MM120's impressive results, investors eager to get in early could see plenty of reason to take a chance on the stock.
Mind Medicine does come with considerable risks
While there is certainly potential for Mind Medicine to one day have an approved product and maybe even become profitable, in the meantime, it's still a fairly risky investment. The company is going to need cash infusions in order to invest in research and development. And even if MM120 obtains approval, the company will need to spend money on commercializing the treatment and rolling it out.
As of the end of last year, Mind Medicine had just under $100 million in cash and cash equivalents on its books. During the year, it also used up $64.4 million in its day-to-day operating activities, which is more than the $50.1 million it burned through in 2022. Investors need to brace for the likelihood that share offerings will be frequent. The company announced one earlier this year, and with no revenue coming in, it's a pattern that is likely to continue, and it will weigh down the stock.
MNMD Shares Outstanding data by YCharts.
Should you buy Mind Medicine stock today?
Mind Medicine is a high-risk investment that isn't going to be suitable for most types of investors. But if you have the tolerance and patience to take on a volatile investment and are aware of the risks of Mind Medicine's business, this could make for an underrated stock to own given the progress MM120 has been showing in clinical trials.
However, for others, it's probably better to take a wait-and-see approach with Mind Medicine to see how MM120 progresses and what the company's outlook becomes for profitability in the future. In the meantime, there are plenty of safer growth stocks out there to choose from. Although you might miss out on gains by waiting to see how Mind Medicine's business evolves, you'll also minimize your risk by not jumping into what's likely to be a volatile stock for the foreseeable future.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
