Big Investors Are Buying Cara Therapeutics Stock. Should You?

Nearly half of Cara Therapeutics (NASDAQ: CARA) shares are owned by institutions. Another 15% of Cara stock is held by funds. Big investors are clearly very interested in the biotech.

Those big investors' interest in Cara Therapeutics appears to have grown over the past few months. According to Morningstar, institutional investors added significantly to their positions in Cara during the second quarter. Here's who's been buying the stock -- and, more importantly, why.

Who's buying

Cara's biggest institutional shareholder, RHO Capital Partners, owns 11% of the biotech. RHO bought over $37 million more in Cara stock in the first quarter of 2017, but didn't add to its position in the second quarter.

State Street (NYSE: STT), on the other hand, added significantly to its stake in Cara in the second quarter. The investment firm bought more than $42 million in Cara stock during the quarter, vaulting into second place among all institutional owners of the biotech.

Another big institutional buyer of Cara stock in the second quarter was BlackRock Fund Advisors (NYSE: BLK). BlackRock bought nearly 1.9 million additional shares of the biotech during the quarter, ranking the firm as one of the top institutional owners of Cara.

Why they're buying

It's not hard to figure out why big firms like State Street and BlackRock have been scooping up more shares of Cara. If the biotech's clinical studies for lead candidate CR845 are successful, Cara Therapeutics should be one of the hottest stocks on the market.

CR845 is an opioid painkiller. With the current opioid addiction crisis making headlines, some might wonder why anyone would be excited about yet another opioid drug. However, CR845 is a different kind of opioid that targets kappa opioid receptors in peripheral nerve cells outside of the central nervous system. Unlike common opioid drugs currently on the market, like hydrocodone and oxycodone, Cara's drug isn't as likely to enter the brain. What that means is that CR845 holds the potential to relieve pain without being highly addictive. If successful, CR845 could very well be a game-changer in treating pain.

There are two formulations of CR845 -- intravenous (IV) and oral. The IV version of the drug is being evaluated in two late-stage clinical studies targeting post-operative pain and pruritis (itching) in patients with chronic kidney disease who are on dialysis. The oral version of CR845 is in phase 2 testing for treating chronic pain. It's also being evaluated in an early stage study for treating pruritis.

The buying in the second quarter happened before Cara announced disappointing results from a phase 2 study of oral CR845 in treating chronic pain in patients with osteoarthritis of the hip or knee. While the drug provided some pain relief for hip patients, there wasn't a statistically significant reduction in pain for knee patients. Cara stock plunged on the news.

Despite this setback, the IV version of CR845 continues to be very promising. And Cara could still enjoy success with the oral version of the drug, since the phase 2 results with hip patients were encouraging.

Is Cara a smart pick for small investors?

With the big money flowing into Cara Therapeutics stock, should small investors follow suit? Maybe -- but maybe not.

Cara clearly has considerable potential. If approved, CR845 should generate peak annual sales of at least $300 million -- and possibly much more, especially if the oral version of the drug proves to be successful. Cara's market cap is less than $420 million right now. There's a lot of room for the stock to move higher on good news.

On the other hand, the stock is tremendously volatile. Cara's beta value is a sky-high 2.61, indicating it experiences significantly more volatility than the overall market. You might run out of fingers to count when tallying up the 20% or more swings in the biotech's stock price this year.

Whether or not Cara stock is a good pick for you depends on your risk tolerance. My take is that IV CR845 will prove to be effective in late-stage studies and ultimately win approval. The jury is still out for the oral version, though. I think Cara stock will move significantly higher in the next couple of years. But I could be wrong. The risk level is high.

If you're comfortable with a lot of risk, buying Cara could pay off in a big way. That's what big investors are counting on. But remember what your parents probably told you when you were a kid: Don't do something just because other people do it. Big investors can lose money just as easily as small ones.

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Keith Speights 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.