The Federal Reserve rate cuts have sent the market up, but some stocks are rising more than others. That includes small pharmaceutical companies like Wave Life Sciences (NASDAQ: WVE), whose shares rose 9% the day after the central bank reduced rates by 50 basis points.

However, rate cuts are not the only reason for excitement around the company. The average of recent Wall Street analyst price targets signals an 85% upside potential in the stock. I’ll analyze the progress Wave Life Sciences has made in its treatment, its financial situation, and what to watch for next.

Wave May Have an “Industry-Leading” DMD Treatment

Wave currently has four drugs in development, but I’ll focus on WVE-N531. This drug aims to treat Duchenne Muscular Dystrophy (DMD), a condition that mostly affects young boys. The drug is currently in Phase 2 Food and Drug Administration (FDA) trials.

DMD is characterized by low levels of dystrophin production. One of the main ways to increase dystrophin production is through “exon skipping." These drugs help the body skip over malfunctioning parts of the genetic code (exons) that cause low dystrophin levels. By skipping over these exons, the body should produce more dystrophin. Wave’s drug specifically aims to skip over exon 53.

In the company's preclinical trials, the drug achieved exon skipping levels of 53%. The firm says this percentage is "industry-leading." Although the company does not cite how much dystrophin production increased, exon skipping correlates with it. So, it is possible that dystrophin production could be industry-leading as well.

From a business perspective, one issue with this treatment is that the market is very small. Different people are affected by different exons malfunctioning. Since WVE-N531 is being researched specifically to skip exon 53, it is currently only aimed at treating 8% to 10% of DMD patients. In the United States and Europe, that is only around 2,300 people. Still, this could result in significant revenue.

According to the firm, exon-skipping treatments brought in $1 billion industry-wide in 2023. Those affected by exon 53 make up around a quarter of the total when looking at the five largest exon patient groups. So, it’s conceivable that there may be a current market of around $250 million for the drug. The DMD market is expected to continue growing considerably; however, estimates are wide-ranging, from 10% to 39% per year.

Wave’s Financials Show Positives and Negatives

Over the past several years, Wave Life Sciences hasn’t been a good investment at all. The stock has provided a cumulative total return of just 5% in three years. As with many small firms in the pharma industry, Wave currently has no approved medications. However, the company has been able to generate some significant revenue.

Wave has generated at least $12 million in revenue in each of the last six quarters. This revenue mainly comes from “collaborations” with large pharmaceutical companies. Takeda (NYSE: TAK) and GSK (NYSE: GSK) have collaborated with Wave. Although Wave isn’t generating much revenue, anything helps when the company is spending $30 million to $40 million a quarter on research and development.

The company currently has $154 million in cash and equivalents on its balance sheet. That may last a little over a year, considering the company has burned through $130 million in cash from operations over the last twelve months. It will need to issue more stock soon, which will dilute shareholders.

Good News Around WVE-N531 and What to Watch For

The company recently received good news regarding the drug. The FDA granted the drug the Rare Pediatric Disease Designation. This means that if the drug is approved, the company will receive a Priority Review Voucher (PRV). The PRV allows the company to speed up the review of a future drug by four months. However, PRVs can also be sold to other companies.

Recent data shows that PRVs are now selling for an average of $100 million. Thus, selling the PRV could bring in significant revenue if WVE-N531 is approved. Alternatively, it could use the PRV itself to speed up the review of its own future treatments.

I’ll be watching Waves' upcoming results for WVE-N531, which they plan to release in Q3. The results will include data on changes in dystrophin levels. Seeing the number come in above the 5.7% to 5.9% increase of the already approved treatment Viltepso could add significant validity to the Wave Life Sciences bull case.