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Investing in early-stage or unknown biotech stocks can be likened to investing in cryptocurrency projects. If the project developments are positive, returns can be multi-folds in a short time. Similarly, biotech stocks can skyrocket on the commercialization of potential blockbuster drugs.

With the covid-19 pandemic, investments have surged in the biotechnology sector. As the research pipeline for various conditions deepens, the investment opportunities continue to expand.

My view is underscored by the point that venture capitalists have pumped $35 billion into biotech companies between 2019 and 2021.

This column focuses on seven unknown biotech stocks that can be potential multi-baggers. Most of these biotech companies are still in the clinical stage of drug development. This implies high risk. However, a sub-portfolio of clinical-stage biotech stocks can be rewarding even if there are few promising stories.

Let's look at the reasons that make these unknown biotech stocks interesting.

Nkarta

Nkarta (NASDAQ:NKTX) stock has been trending lower in the last 12 months. However, the unknown biotech stock holds value at current levels. With some promising developments, NKTX stock is likely to surge in 2023.

For clinical-stage biotechnology companies, financing research is a key challenge. Nkarta is well positioned on that front with cash and equivalents of $415 million as of Q2 2022. The cash buffer is sufficient to fund the company's plans through 2025. Also, with no near-term dilution risk, the stock is likely to trend higher on clinical trial results.

Nkarta is a clinical-stage biotechnology company focused on developing engineered natural killer cell therapies to treat cancer. Phase one clinical trials are already ongoing for two drug candidates.

In April 2022, the company reported positive initial data for these two product candidates and the stock surged. With several upcoming milestones over the next 12-15 months, I am bullish on NKTX stock for 2023.

ImmunityBio

ImmunityBio (NASDAQ:IBRX) stock has also been subdued in the last 12 months. However, clinical developments have been positive and a reversal rally seems overdue.

ImmunityBio is focused on treatments for advanced cancer and infectious disease. Currently, the company's pipeline has eight drug candidates for solid tumors. Additionally, there is a pipeline for infectious diseases that focuses on HIV and Covid-19.

An important point to note is that the company's bladder cancer treatment candidate is already in Phase 3.

Furthermore, the U.S. Food and Drug Administration has accepted to review the company's drug candidate for biological license application. With the outcome likely by May 2023, there is a potential catalyst for IBRX stock.

ImmunityBio reported cash and equivalents of $83 million for Q2 2022. With a deep research pipeline, financing is likely in the coming quarters. If the company can successfully raise additional funds, I expect the stock to trend higher even after discounting the dilution factor.

FibroGen

FibroGen (NASDAQ:FGEN) is another unknown biotech stock that seems poised for a big rally. The biotech company already has a commercialized drug that's generating revenue. Further, there is a deep pipeline of candidates that make the stock promising.

For Q2 2022, FibroGen reported revenue growth of 22% on a year-on-year basis to $29.8 million. Roxadustat (for chronic kidney disease), has delivered a strong performance in China. The drug continues to be approved in several countries, which will support revenue growth.

It's worth noting that top-line data for four pipeline candidates (Phase 3) is expected in 2023. This is a major catalyst for FGEN stock. From a financial perspective, FibroGen reported cash and equivalents of $517.6 million as of Q2 2022. Further, the company expects to close 2022 with a cash balance of $330 to $360 million. The cash buffer is likely to fund research and development for a large part of 2023.

Heron Therapeutics

Heron Therapeutics (NASDAQ:HRTX) is another commercial-stage biotechnology small-cap stock that looks promising. With short interest of almost 40%, HRTX is also worth keeping in the radar for a big short-squeeze rally.

In September 2022, Heron received U.S. FDA approval for a post-operative agent to address nausea and vomiting. This is the company's fourth drug approval by the FDA.

For the first half of 2022, the company reported revenue of $51.1 million. For the same period, net losses widened to $120.2 million. However, that's not a concern considering the point that Heron is still at an early growth stage.

It's also worth noting that the company raised $76.5 million in a private offering last month. With a total cash buffer of $158.7 million, the company has a cash runway through 2024.

Overall, HRTX looks like a good investment opportunity. If top-line growth accelerates in 2023 with multiple commercialized products, the stock is likely to surge.

Avidity Biosciences

With more research and development focused on RNA therapeutics, Avidity Biosciences (NASDAQ:RNA) looks attractive. I believe that RNA stock is among the hidden gems that can deliver multi-fold returns in the long term.

The company has a robust pipeline with Phase one and two trials for AOC 1001 ongoing. A preliminary assessment is also likely in Q4 2022. It's worth noting that the FDA has already granted orphan and fast-track designation for the drug candidate.

Further, trials for two more muscle disorder candidates are due to commence towards the end of 2022. Therefore, there are potential catalysts that can take the stock higher in the next few quarters. If initial data is promising, it will set the stage for a meaningful rally.

Avidity ended Q2 2022 with cash and equivalents of $398.2 million. For Q2 2022, the company incurred $39.8 million in R&D expenses. Even if the high level of investments sustain, Avidity seems fully financed for the next 12-18 months. Near-term dilution risk is therefore low.

Sana Biotechnologies

Sana Biotechnologies (NASDAQ:SANA) has high short interest and I believe that the biotech stock is poised for a short-squeeze rally.

As an overview, the biotechnology company is focused on developing engineered cells for various medical conditions. The company believes that almost all disease is caused by damage or dysfunction of a cell. Therefore, the addressable market is big with potential medicines covering a broad range of medical conditions.

It's worth noting that the company's drug candidates are still in the pre-clinical stage. Sana expects to file INDs for two drug candidates later this year. The company also expects to file "INDs across several platforms with multiple drug products in both 2022 and 2023." SANA stock is likely to remain in the limelight.

Sana Biotechnologies has a cash buffer of $579.6 million as of Q2 2022. The robust cash buffer will allow the company to accelerate its pipeline in the next few years.

Relay Therapeutics

I would also add Relay Therapeutics (NASDAQ:RLAY) stock to the list of unknown biotech stocks with upside potential.

After a recent surge, RLAY stock has corrected with the company announcing a $300 million offering of shares. The dilution-driven correction seems like a good time to consider fresh exposure to the stock.

In terms of good news, Relay reported positive data for Phase 1/2 study for bile duct cancer therapy RLY-4008. The initial results have exceeded the company's optimistic expectations. With the stock offering, the company is positioning itself for the next stages of trial and deepening the product pipeline.

As of Q2 2022, the company reported $60.5 million in research and development expenses. This implies an annualized spending of $250 million. Relay already has five discovery programs with three targeted towards oncology. Another two are for genetic diseases.

With cash and equivalents of $838 million as of Q2 2022, the company has a runway through 2025. The recent stock offering will also boost the cash buffer.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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