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With Rocket Pharmaceuticals(NASDAQ: RCKT) shares surging 38% higher on Sept. 13, it’s clear that the stock has its enthusiastic supporters.

The rare disease drug developer just announced that the Food and Drug Administration (FDA) gave it the go-ahead to conduct a phase 2 clinical trial testing its gene therapy for Danon disease, a fatal and rare hereditary cardiac disorder for which there is currently no treatment.

The company is now yet another step closer to commercialization, and given that its candidate already has both the fast track and orphan drug designations, the road to the market might not be very long at all.

Still, Rocket remains a pre-revenue biotech, which means that it will need to profitably launch a medicine and take out fresh debt or raise more capital if it’s going to survive. Let’s explore why that makes this stock riskier than meets the eye.

The future is bright…or is it?

Rocket Pharmaceuticals appears to be on track to commercialize its first medicine within the next couple of years; however, there are a few reasons why it might not be as great for shareholders as it sounds.

Regulators are currently considering its petition to commercialize its gene therapy for leukocyte adhesion deficiency 1 (LAD-1), a rare inherited disorder of the immune system that is typically fatal for most patients before age 40. But only about 1,000 people in the U.S. and the E.U. are typically suffering with this disease at any given time, with between 50 and 75 new diagnoses per year. Moreover, the company’s candidate appears to be curative, or at least highly effective with one dose. So it could very easily cure its way out of a market for its medicine.

It’s also looking to submit its materials to the FDA for approval of its program to treat Fanconi anemia before the end of the year. But it’s very much the same situation as with LAD-1; at most, there are 7,000 patients to treat in the U.S. and Europe, with an additional 200 to 275 diagnosed per year, and the treatment is likely curative or near-curative. Even without any competitors in the space, there is likely a fairly low cap on the amount of revenue the biotech can make from its medicine.

Furthermore, gene therapies based on viral vectors, like Rocket’s, tend to be very expensive to produce and administer. There might be issues with becoming profitable even after moving one or more of its medicines to the market. And the small target populations of patients may well be hard to find and onboard, assuming they can afford the cost of treatment.

Resources aren’t too tight for now

Rocket Pharmaceuticals is probably on the verge of commercializing its first drug, and there’s a credible chance that its next attempt will succeed. If so, there’s no question that patients with those rare diseases will get a desperately needed chance to live a full life that they wouldn’t have had otherwise.

But for investors, the question is whether this biotech can make enough money from these small markets as that is what will be carrying its share price in the long term. Thankfully, there aren’t any indications that the pace of research and development (R&D) will need to slow.

As of the second quarter, it had $307 million of cash and equivalents, which management claims can last it through the first half of 2025. Plus, on Sept. 13, it priced an offering of stock and warrants that is expected to raise $175 million. In 2022, its operating expenses were roughly $224 million, so the new offering should secure it around three more quarters of runway before its funds run out.

For a pre-revenue biotech, it’s decently capitalized. Nonetheless, given the uncertainty about how it’ll fare if its therapy for LAD-1 is commercialized, investors should view this company as a high-risk pick for investors even as it may be able to provide great help to some patients.

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Alex Carchidi 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.

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