What happened

Shares of Nektar Therapeutics (NASDAQ:NKTR) rose as much as 17% today as investors poured back into the biopharma stock following a sharp sell-off earlier this week. The huge drop days ago was caused by a disappointing weekend presentation at the American Society of Clinical Oncology's annual meeting, in which the company shared preliminary data on an important ongoing program evaluating a combination of drug candidate NKTR-214 with Opdivo from Bristol-Myers Squibb to treat various solid tumor cancers.

Today, investors are simply betting that the more than 40% stumble was overdone. The argument isn't entirely invalid. While Nektar Therapeutics saw its market cap shoot up from less than $4 billion this time last year to over $16 billion in April, the biopharma is far from a one-trick pony.

As of 3:35 p.m. EDT, the stock had settled to a 8.2% gain.

A man holding out his hands with coins and a chart showing growth sitting in them.

Image source: Getty Images.

So what

The ASCO presentation was just the latest reminder that incredible results from small trials should be viewed with cautious optimism (and probably more caution than optimism). Nektar Therapeutics showed that the efficacy of the NKTR-214 and Opdivo combination didn't hold up from smaller, earlier studies.

At the previous study checkpoint, 11 of 13 melanoma patients showed a response to the combo. But at the latest check-in, only 14 of 28 patients responded to treatment. A similar slide in efficacy was uncovered in kidney cancer, which previously demonstrated responses in seven of 11 patients, compared to only 12 of 26 most recently. 

Considering the study is now partnered with Bristol-Myers Squibb, which handed over $1.85 billion in February and lucrative royalty rights should the combo gain marketing approval, investors became worried the therapy may not be destined to become a blockbuster product.

While the most recent results are deflating, Nektar Therapeutics has quite a few shots on goal. That includes four separate drug candidates in trials further along than the NKTR-214 combo, and several other trials investigating NKTR-214 as part of a combination with other oncology drugs and as a stand-alone treatment. And, of course, the company has the $1.85 billion from Bristol-Myers Squibb no matter what, which can fund pipeline development for about two years at the current cash burn rate.

Now what

Bounces like the one Nektar Therapeutics is experiencing today are pretty commonplace for biopharma stocks that encounter major sell-offs. Does it prove that the drop was overdone? Well, it's true that the pipeline has a healthy amount of potential. But it's also true that the current $10 billion market cap could prove difficult to justify right now. Investors should expect volatility to continue for the foreseeable future, and simply have to await further clinical updates coming down the pipe in the next several quarters.