Earlier this year, Bristol-Myers Squibb (NYSE:BMY) made Nektar Therapeutics (NASDAQ:NKTR) a stock market darling by offering billions for rights to an experimental new cancer drug. Recently, a well-regarded analyst said the partnered treatment isn't worth a nickel and investors are getting worried Bristol may have made a terrible mistake.

In February, Bristol-Myers Squibb shelled out $1.85 billion up front for rights to NKTR-214 because it looked like Nektar's candidate could eventually boost sales of Bristol's lead drug. Just how dire is the case for Bristol-Myers and its investment? Here's what you need to know. 

Confused-looking person looking at cash that's flying from his pockets to a black hole on the floor.

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Why NKTR-214 could be worthless

The candidate Bristol wants to pair with its cancer therapy is supposed to dial up an attack on cancer cells by activating the patient's cancer-killing T-cells. According to Nektar, NKTR-214 is especially useful because it's pegylated to make it last longer in the bloodstream. 

According to an ex-Kerrisdale analyst, Aaron Wedlund, NKTR-214 is simply a pegylated form of a well-understood, naturally occurring cytokine known as interleukin 2 (IL2). His scathing report also contends that adding propylene glycol to IL2 makes it mostly useless. Unfortunately for Nektar and Bristol, clinical trial results suggest Wedlund is on to something.

During the early-stage Excel trial, 28 cancer patients received NKTR-214 on its own and not one exhibited signs of tumor shrinkage. Proleukin is essentially un-pegylated IL2 that's been around for decades and during studies that led to its approval, it shrank or completely removed tumors for around 15% of patients who took it.

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A huge mistake?

It's hard to believe that Bristol-Myers committed billions to NKTR-214 without understanding the potential pitfalls that Wedlund unearthed. That said, there were some interesting results exhibited last year that may have distracted the big pharma from doing its homework. Last June, investigators showed us that during the first part of the Pivot-2 study, NKTR-214 plus Opdivo led to tumor responses among 72% of patients with advanced-stage cancer. 

Since then, however, expectations for the drug have fallen along with observed response rates across the board. In November, 71% of 13 kidney cancer patients showed tumor responses, but six months later, the response rate in that group fell to just 54% of 24 patients. During the latest update, Nektar shared data from roughly one-third of the 283 patients enrolled in the trial. If those we haven't seen data for performed any worse, Bristol's investment into Nektar will look like an awful mistake.

Earlier this year, epacadostat failed to improve the performance of a drug similar to Opdivo in a full-sized pivotal study. Epacadostat was a novel new approach that showed a 56% overall response rate in an early study with melanoma patients. With response rates for NKTR-214 around the same level, investors are justifiably nervous about its ability to outperform Opdivo on its own.  

In a tough spot

Even if adding NKTR-214 to Opdivo actually provides a significant benefit, it's launch could be far more difficult than Bristol-Myers anticipated when striking its deal with Nektar. A year of Opdivo treatment expenses run into six figures and adding a second new cancer drug would cost a lot more than insurers are probably prepared to pay when there might be a much cheaper option.

Lab researcher counting money.

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Keytruda from Merck & Co. (NYSE:MRK) takes the brakes off the immune system so it can fight cancer in the same way as Opdivo. Earlier this year, we learned that adding Keytruda to standard chemotherapy led to a 51% reduction in the risk of death for newly diagnosed lung cancer patients.

Given the relatively low cost of chemotherapy compared to new cancer drugs that generally cost six figures annually, NKTR-214 plus Opdivo needs to outperform Keytruda plus chemotherapy at a rate that end payers can't ignore. Even if all goes well for NKTR-214 and Opdivo from here on out, the combo's chance to eventually generate significant sales doesn't look good.

What's next

In the first half of 2018, Opdivo sales rose 35% to $3.1 billion and a recent approval to treat second-line small-cell lung cancer patients will help provide further growth. Around 10% to 15% of lung cancer cases are of the small-cell variety, but these patients haven't seen a new treatment option in decades.

In the second quarter, Bristol-Myers began selling Yervoy plus Opdivo to newly diagnosed kidney cancer patients. While this indication isn't nearly as large as lung cancer, it could begin adding more than $1 billion to total annual sales within a couple of years. Although Bristol's deal with Nektar is beginning to look like a big mistake, it's one the big pharma company can probably afford to make.

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.