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Growth stocks have the potential to generate significant returns, because they frequently represent companies in emerging industries or with innovative products and services.

That said, not every growth stock can grow its revenue and earnings at a substantial rate over time. However, investors often have high hopes for clinical-stage biotech companies focused on finding a cure for life-threatening diseases. Biomea Fusion (BMEA), an emerging biotech player, is one of those companies we'll look at today.

Biomea stock gained 72% last year, wildly outperforming the S&P 500 Index’s ($SPX) gain of 25%, fueled by the positive preclinical and clinical results from its upcoming candidates.

However, the U.S. Food and Drug Administration (FDA) has put a clinical hold on two of Biomea's candidates, which has made investors and analysts skeptical of the stock.

As of this writing, the stock has dropped 64.3% year-to-date. Nevertheless, analysts’ average target price of $24.43 still suggests the stock could soar as high as 370.7% over the next 12 months.

Given the current scenario, the target might seem far-fetched right now. Let’s dig in to find out if this growth stock is a worthwhile buy on the dip.

Is Biomea Fusion Stock a Buy Now?

Valued at a market cap of $174 million, Biomea Fusion focuses on irreversible small molecules to treat genetically defined cancers and other metabolic diseases through its drug discovery platform, the FUSION System.

While the company's innovative methods piqued Wall Street's interest, recent setbacks have raised concerns about the company's future.

On June 6, Biomea announced that the FDA had placed two of its Phase 1/2 clinical trial candidates, COVALENT-111 and COVALENT-112, on full clinical hold. The trials involved the company's investigational type 2 and type 1 diabetes drug, BMF-219. The drug sought to "regenerate insulin-producing beta cells."

In its first-quarter results released on May 2, the company announced positive data from the Phase 1/2 study of COVALENT-111 in type 2 diabetes clinical trials, demonstrating "durable improved glycemic control while off therapy for 22 weeks." Furthermore, preliminary clinical data from a Phase 2 study of COVALENT-112 in type 1 diabetes revealed improved beta-cell function in patients.

However, the FDA put a hold on the clinical trials, citing the reason as “deficiencies based on the level of possible drug-induced hepatotoxicity.”

Thomas Butler, Biomea’s CEO, stated, “We respect the FDA’s decision and agree that patient safety is paramount and our top priority. We are fully collaborating and working diligently with the FDA to put a plan in place as quickly as possible to ensure patient safety and look forward to resuming the studies once we have authorization from the FDA.”

In addition, the company has other oncology candidates in the pipeline. Biomea stated that the Phase 2 clinical trial for BMF-219 (COVALENT-101) for acute myeloid leukemia (AML) could start soon. However, at the clinical stage, biotech companies tend to burn cash quickly, which is a source of concern.

Biomea reported a net loss of $39.1 million in the first quarter, with no approved products currently generating revenue. Cash, cash equivalents, and restricted cash totaled $145.3 million.

What Does Wall Street Say About Biomea Fusion?

Following the clinical trial halt, most analysts tracking Biomea revised their ratings and target prices.

Truist Securities downgraded BMEA stock to "hold" from "buy," and removed the target price. The firm believes there is insufficient information as to when the clinical hold will be lifted. Concerns about the company's financial condition have also increased. Truist advises investors to be cautious about BMEA until the company resolves the situation.

Furthermore, JPMorgan, Barclays, H.C. Wainwright, and Scotiabank all reduced their target prices for the stock. Currently, the average target price for BMEA stock is $24.43, 370.7% higher than current levels.

Overall, Wall Street considers Biomea Fusion's stock a "moderate buy." Five of the eight analysts who cover the stock rate it as a "strong buy," with three recommending a "hold."

The Bottom Line on BMEA Stock

Biomea's approach to drug development for life-threatening diseases is undeniably innovative, with excellent long-term potential. However, given the current situation, I agree with Wall Street's cautious assessment. The company is still in the clinical stages, with no approved products yet. Furthermore, until Biomea Fusion resolves the clinical hold issue and presents solid data from clinical trials, the stock might not be worth taking the risk.

Positive results from ongoing and future clinical trials will be critical in reestablishing investor and analyst confidence in the stock. As a result, it would be wise to steer clear of this stock now.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.