Bristol-Myers Squibb (NYSE:BMY) has placed a lot of chips on its partnership with Nektar Therapeutics (NASDAQ:NKTR), encouraging plenty of investors to shovel money at the smaller biotech.

Now shareholders are jumping ship because they're scared that Bristol jumped too soon. As is often the case with encouraging results from very small patient groups, it doesn't look like the partnered candidate can put up stellar numbers in a larger study. That could be a huge problem for this partnership, but Nektar has other irons in the fire.

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Was the reaction to Nektar's presentation at the American Society of Clinical Oncology's annual meeting overblown? Let's survey the moving pieces to find out if there's a bargain here.

The big deal

Back in February, Bristol-Myers Squibb handed Nektar $1.85 billion in cash for limited rights to NKTR-214, because it looked like it could expand the use of Bristol's lead drug, Opdivo. This and several other PD-1 checkpoint inhibitors produce impressive results, but only for a relatively small percentage of patients. Bristol handed Nektar all that cash, and agreed to pay a whopping 65% royalty on global profits of NKTR-214 when used in combination with Opdivo, in the belief that the PD-1 inhibitor could greatly expand Opdivo's reach and sales.

At a November cutoff, Nektar showed that tumors in 11 of 13 melanoma patients responded to a combination of NKTR-214 and Opdivo. Investors were less than thrilled to see just 14 of 28 responding as of late May, and that wasn't an isolated incident. Over the same period, response rates among kidney cancer patients went from 64% of 11 in November to just 46% of 26 in May.

Nektar seemed confident that patients added more recently probably haven't had enough time to exhibit responses, and patients who responded earlier were doing even better at the more recent observation point. The company was so confident, in fact, that it framed its presentation around the combo's ability to hit predetermined efficacy targets that will trigger larger studies designed to support new drug applications.

The market hacked around $6 billion from Nektar's market cap following the news, in large part because the bar for success is extremely high now. Even if the combo can produce a long-term survival benefit, it's going to be hard to beat the results that Merck & Co.'s PD-1 inhibitor recently provided. Adding Merck's Keytruda to standard chemotherapy reduced the risk of death by 51% for newly diagnosed patients with advanced-stage lung cancer.

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A lower perch to fall from

Nektar Therapeutics went into ASCO with a lot to lose, but now that the company sports a slimmed-down $8.9 billion market cap, the stock looks a lot less risky. The company has a handful of drugs in clinical-stage testing including NKTR-181, a potential solution for physicians who want to fight lower back pain with less risk of the abuse and addiction problems that traditional opioids are known for.

Nektar's opioid takes hours before patients notice an effect, and when asked they were significantly less likely to report liking the drug than when asked about traditional opioids. Unlike previous reformulations of traditional opioids, which addicts have found laughable, NKTR-181 is a new entity that reaches the brain slowly no matter how it gets into the bloodstream.

On any given day, an estimated 31 million Americans can complain of low back pain, and physicians need to be highly selective about which patients receive the traditional opioids that can lead to abuse. If NKTR-181's abuse-deterrent nature tips the scales just a little in Nektar's favor, it could begin contributing more than $1 billion to the company's top line within several years. We'll know if Nektar's opioid has a shot soon -- the company recently submitted an application to the Food and Drug Administration.

In the numbers

Nektar is burning through a lot of money, but it won't need to make any moves out of desperation in the foreseeable future. The company recorded $66 million in combined product sales and royalties last year, but spent $99 million on research and development expenses in the first three months of 2018. After losing $96 million in the first quarter, the company finished March with a healthy $334 million cash balance, which doesn't include $1.85 billion on the way from Bristol-Myers.

Bristol-Myers isn't the only company that wants to expand its use of PD-1 inhibitors, and Nektar's deal with Bristol is anything but exclusive. Even if NKTR-214 plus Opdivo doesn't become a blockbuster combination therapy in lung cancer, Nektar's candidate still has a solid shot at producing significant revenue in smaller indications, and through a handful of partnerships with other drugmakers.

I think Nektar's still risky, but there's a bargain here for intrepid investors. This October, look for more trial data with Opdivo plus NKTR-214 in lung cancer, which could send the stock screaming back. Also, NKTR-181 could provide more lift down the road.

Cory Renauer 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.