Developing new cancer therapies is such a risky business that it doesn't take much to send investors running for the hills. Over the past six months, Aduro BioTech Inc. (ADRO) and Nektar Therapeutics (NKTR -3.85%) have lost more than half their value despite reporting clinical trial results their management teams consider encouraging.

Has the market gone too far, or are investors right to worry about potential problems lurking below the surface? Here's what you need to know.

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Aduro BioTech Inc.: Stung twice

Aduro BioTech Inc. shares crashed in October in a case of guilt by association and have given up 57% over the past six months. Aduro's lead candidate, ADU-S100, activates stimulator of interferon genes (STING) receptors, an unproven technique that's supposed to crank up immune responses to tumor cells.

Checkpoint inhibitors that take the brakes off the immune system, such as Opdivo and Keytruda, provide tremendous results for many, but roughly two-thirds of patients that try the pricey treatments see little to no benefit. Investors and Aduro's partners had hoped ADU-S100 would incite immune responses to tumors that would continue unabated with help from a checkpoint inhibitor until patients were disease free.

Unfortunately, Merck & Co. (MRK 0.95%) has a STING agonist, called MK-1434, in clinical trials too, and the initial results were a big disappointment. During a phase 1 study, just 6 out of 25 patients with various solid tumors that received Merck's STING agonist plus Keytruda showed partial responses. Moreover, investigators didn't record any tumor shrinkage among patients that received Merck's STING agonist on its own. 

Investors weren't expecting fireworks from the first 40 melanoma patients evaluated after receiving an injection of ADU-S100 directly into their melanoma tumors. When just two showed partial responses, though, Aduro's market cap slid all the way down to just $288 million.

Aduro shares have tanked, but the company's balance sheet boasted a $266 million cash balance at the end of September, which means it carries an enterprise value of just $22 million at recent prices. Aduro is still enrolling melanoma patients in a combination study with an experimental PD-1 inhibitor from Novartis (NVS 0.20%) called spartalizumab. Although several patients remained on study longer than six months, the partners don't think that's long enough to tell us if any of their tumors have been neutralized.

Although it looks like Aduro's partnership with Novartis isn't going anywhere fast, Aduro still has an anti-CD27 antibody in phase 1 testing that it licensed to Merck in 2015 and a wholly owned anti-APRIL antibody in development. APRIL and CD27 haven't been proven in any large controlled studies yet, and limited success for a CD27 treatment already in mid-stage development doesn't bode well for Aduro's partnership with Merck.

Aduro could soar like a phoenix from the ashes if one of its candidates squeaks out a surprise win, but it might be better to wait for more signs that the unproven drug classes it's experimenting with are actually worth the effort. 

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Nektar Therapeutics: It might work

Nektar is stirring more pots than Aduro is, but that didn't prevent its stock price from sinking 55% over the past six months. The company's interleukin-2 inhibitor, NKTR-214, is essentially a longer-lasting version of a cancer therapy called Proleukin that earned approval decades ago. Proleukin is very effective unless given in doses that are hard to tolerate, and it never really gained traction. Nektar thinks it's solved the puzzle with pegylation technology, but not everyone's convinced.

Attaching polyethylene glycol to drugs can allow lower doses to remain effective for longer periods, but it can also render them useless. During the phase 1 Excel study, which enrolled relapsed patients with solid tumors, NKTR-214 failed to elicit any responses as a solo treatment, but some patients that went on to try Opdivo did better than expected. 

Nektar took a big risk by enrolling 480 patients in the Pivot-2 study with NKTR-214 plus Opdivo, but it paid off when tumors shrank for 26 of the first 36 patients enrolled, including patients with PD-1-negative tumors that generally don't react to drugs like Opdivo. Bristol-Myers Squibb (BMY -0.80%) was so impressed that it signed a $3.6 billion deal with Nektar for limited rights to NKTR-214 earlier this year, but the big pharma partner may have jumped too soon.  

At the latest update, the confirmed best overall response rate fell to just 53%, and down to just 43% for those with PD-1-negative tumors. Those response rates aren't a whole lot better than one might expect from Opdivo on its own, which means an accelerated approval is out of the question. With Bristol-Myers on the hook for at least two-thirds of development expenses, the big pharma will find more promising programs to support unless we see some big improvements.

Doctor showing cancer patient her chart.

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Most likely to rebound

Aduro's early-clinical-stage pipeline is too risky at any price, but Nektar has a handful of marketed products with minor sales and a potential blockbuster opioid under review that could allow the stock to rebound even if NKTR-214 is a dud. Thanks to Bristol-Myers, Nektar also finished September with $2.0 billion in cash and securities.

Although Nektar seems more likely to rebound than Aduro, it hardly looks like a bargain opportunity right now. The biotech's recent $6.4 billion market cap could fall much further if NKTR-214 continues to disappoint.