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The biotech sector is finally beginning to recover following a two year stretch of underperformance that was largely driven by rising interest rates and other macro factors. Biotech has a track record of strong recoveries, with the sector typically seeing double-digit gains after a downturn. This is something investors shouldn’t ignore.

This recent turnaround can be credited to a robust increase in fundraising efforts and an uptick in IPOs, reaching levels not seen since the peak of the mid-pandemic market boom.

According to the Financial Times, drug developers raised $6 billion in equity capital markets in January, the largest total since February 2021 – a period when biotech stocks hit their all-time high. Moreover, the SPDR S&P Biotech ETF (XBI) returned 28.7% over the past six months alone, clearly illustrating investors' rising confidence in the biotech rebound.

Identifying biotech stocks with the potential to deliver superior returns is no easy feat. There are specific milestones that companies can achieve to signal positive momentum to investors. For example, smaller biotech companies may have received the nod from regulatory authorities such as the FDA, or new breakthroughs from clinical trials, to offer a compelling investment opportunity.

With that in mind, two stocks that investors should consider looking at are Cardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) and Kiniksa Pharmaceuticals (NASDAQ:KNSA).

Cardiol Therapeutics lead product is CardiolRx™, a small molecule therapy that appears on track to bring major disruption to the pericarditis market.

CardiolRx™ received a vote of confidence as it was granted Orphan Drug Designation (ODD) by the FDA for the treatment of pericarditis back in February, illustrating the potential of the drug. Apart from providing a seven-year term of market exclusivity upon final FDA approval, the ODD also positions Cardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) to be able to leverage a wide range of financial and regulatory benefits, including government grants for conducting clinical trials, waiver of expensive FDA user fees, and certain tax credits.

The U.S. Orphan Drug Act is intended to assist and encourage companies to develop safe and effective therapies for the treatment of rare diseases and disorders, defined as one that affects fewer than 200,000 people in the U.S. There are approximately 160,000 cases of recurrent pericarditis in the U.S. annually, which includes 38,000 cases with a recurrence. Having secured FDA approval, Cardiol Therapeutics is an exemplary company likely to attract biotech investors seeking assurance in smaller firms.

While the stock had a significant rally on the backdrop of this news and continues to show strength, we believe that there is still potential for further upside.

Cardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) is expected to release topline data in June for its Phase 2 MAvERIC-Pilot clinical trial, which if positive, could unlock significant shareholder value. Several analysts have already indicated that they are highly optimistic that the data could be a catalyst, with one analyst noting that “CardiolRx’s potential to be a safe, new approach to RP (recurrent pericarditis) treatment is underappreciated.”

CardiolRx™ stands out when compared to the only FDA-approved therapy because it is administered orally and expected to be offered as a first-line therapy for pericarditis, opening it up to an even bigger opportunity as it could be prescribed at the first occurrence.

Orphan drugs have become lucrative business opportunities because these drugs command premium drug pricing, with the average price for an orphan drug at $32,000 per year per patient according to a 2021 study published in the journal Rare Diseases & Journal of Orphan Drugs.

That could explain why analysts who have been tracking CRDL are so bullish on the stock. For instance, Joe Gantoss of Chimera Research Group says he won’t be surprised to see Cardiol’s price break past the 3-year high at $4.96, while analyst Vernon Bernardino of H.C. Wainwright & Co. reiterated their Buy rating and issued a $9.00 price target.

That would imply that Cardiol Therapeutics (NASDAQ:CRDL) (TSX:CRDL) has a potential upside of about 300% from its current share price.

Kiniksa Pharmaceuticals (NASDAQ:KNSA) offers some insight into the revenue potential of an orphan drug that treats recurrent pericarditis.

So far, KNSA has had a great run, gaining about 36% over the past year and trading at about $18.00 per share despite challenges in the sector. It is currently valued at $1.3 billion. Kiniksa’s portfolio of assets includes ARCALYST®, the first and only FDA-approved therapy for recurrent pericarditis.

For some context, the FDA granted Breakthrough Therapy designation to ARCALYST® for recurrent pericarditis in 2019; the FDA granted Orphan Drug exclusivity to ARCALYST® in March 2021 for the treatment of recurrent pericarditis and a reduction in the risk of recurrence in adults and pediatric patients 12 years of age and older. The European Commission granted Orphan Drug Designation to ARCALYST for the treatment of idiopathic pericarditis in 2021.

Sales of ARCALYST® were $38.5 million in 2021; $122.5 million in 2022; $233.2 million in 2023 further reaffirming the massive revenue potential for treating recurrent pericarditis. For the first quarter of 2024, ARCALYST® sales were $78.9 million representing 85% year-over-year growth.

Furthermore, since its launch in April 2021, approximately 2,000 prescribers have written ARCALYST® prescriptions for recurrent pericarditis, illustrating the massive demand for effective recurrent pericarditis therapies.

Going forward, Kiniksa anticipates that it will bring in between $370 million and $390 million in 2024, up from the earlier guidance of $360 million to $380 million. The revised outlook represents roughly 63% year-over-year growth at the midpoint.

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