Biotech investors know not to place too much value on early-stage results from a small number of patients, but that doesn't stop Mr. Market from getting carried away from time to time. NextCure (NASDAQ:NXTC) became the latest example of why that's rarely a great idea. 

Preliminary results from its lead drug candidate pushed shares to a gain of over 225% on Nov. 5. A week later, the company shared updated preliminary results from the same study that suggested the pipeline asset held promise, but the update was less rosy. Shares fell more than 50% in response.

The drama wasn't all for nothing. The small-cap stock is still up 33% in the last month, and NextCure wisely took advantage of the situation by raising $150 million in gross proceeds through a public stock offering. That said, investors might be wondering what to think of the biopharma now that the dust is settling. Here's a deeper dive into the newly public company. 

A man in a defensive pose standing next to bacteria painted on a wall.

Image source: Getty Images.

Does NextCure have the next big checkpoint inhibitor?

A number of biopharma companies that had initial public offerings (IPOs) in the last year are developing technology platforms based on the collection, annotation, and analysis of vast stores of biological data. NextCure wields the Functional Integrated NextCure Discovery in Immuno-Oncology (FIND-IO) -- a platform for studying the structure of immune cells and the compounds they secrete when called to action. The idea is to leverage the power of data analysis to develop novel immunotherapies other methods might be overlooking. 

It sounds novel, and the FIND-IO platform is proprietary, but the general approach is quickly becoming table stakes in modern biopharmaceutical development. That's not to say it won't prove valuable.

At the end of 2018, NextCure inked a collaboration with Eli Lilly (NYSE:LLY) to discover and develop immuno-oncology therapies using the FIND-IO platform. The small-cap company received an up-front payment of $25 million; an equity investment of $15 million; and is eligible to receive up to $1.4 billion in development and sales milestones, plus royalties. 

The partnership with Eli Lilly is in the discovery phase, which means it still has to select appropriate targets and perform pre-clinical studies before advancing to the clinic. The companies don't plan on filing an investigational new drug (IND) application -- needed to begin clinical trials -- until late 2022. 

But investors have more to look forward to than that. NextCure focused its initial efforts on developing two drug candidates that target proteins with important roles regulating how the immune system responds to tumor cells. 

The lead drug candidate, NC318, targets Siglec-15 (S15), which was discovered by Dr. Lieping Chen of Yale University using a predecessor of FIND-IO. Chen discovered the PD-L1 pathway that gave rise to blockbuster drugs such as Keytruda from Merck and Opdivo from Bristol-Myers Squibb. Those drugs work by inhibiting the PD-1 or PD-L1 proteins expressed on the surface of cancer cells that allow them to escape the immune system. 

But many cancer cells express S15 instead of PD-1 or PD-L1, which is thought to explain why so many individuals don't respond or develop resistance to Keytruda or Opdivo. That could make NC318 an important drug candidate in the industry's immuno-oncology pipeline. It also helps to explain why the initial results from a phase 1/2 trial (discussed below) touched off the recent stock price volatility.

The second drug candidate, NC410, targets LAIR-1. The immunomodulatory protein inactivates T cells by binding to certain receptors expressed on their surface, which is thought to significantly reduce the immune system's effectiveness within the tumor microenvironment (TME). NC410 will attempt to block the binding of the LAIR-1 protein to immune cells and potentially allow natural killer cells to live up to their name.

A scientist in a lab with a dejected look on his face.

Image source: Getty Images.

What about the latest clinical results?

The volatility defining NextCure's stock recently -- and no doubt put it on the radar of many investors -- stems from two updates related to an ongoing phase 1/2 study evaluating NC318. 

Initial results noted that five of the seven individuals with non-small-cell lung cancer (NSCLC) achieved a response, which translated to an impressive disease control rate (DCR) of 71%. One patient had no signs of cancer (called a complete response), one patient had tumor shrinkage (called a partial response), and three had stable disease. That suggested that the S15 pathway may in fact be as important as the company thought.

But slightly updated results presented from the first 10 individuals with NSCLC, including data from three new patients compared with the initial update, revealed that no new responses were achieved. The news forced investors to walk back the massive gains handed out just days earlier. 

To be fair, the results presented to date are relatively solid. They were presented from the phase 1 part of the phase 1/2 trial. That means NextCure is evaluating various doses of NC318 to determine the safest and most effective dose for more advanced clinical trials. The results include individuals taking anywhere from 8 mg to 400 mg every two weeks. There should be a lot of variance in the data.

Additionally, the results include outcomes for 15 unique tumor types. Given the various doses and the small number of individuals involved, investors really can't jump to conclusions at this time other than admitting that there were promising trends observed and that the drug candidate deserves further study. Results from the phase 2 portion of the ongoing study, which will use a narrower range of doses and include more patients, are expected by the end of 2020.

Looking beyond the lead drug candidate, NextCure expects to file an IND for NC410 in the first quarter of 2020 and an IND for its third and yet-to-be-named pipeline asset in early 2021. That suggests operating expenses and cash burn are going to increase substantially in the next two years. 

Metric

First Nine Months 2019

First Nine Months 2018

Change 

Revenue

$4.3 million

$0

N/A

Operating expenses

$29.8 million

$16.1 million

85%

Operating income (loss)

($25.5 million)

($16.1 million)

N/A

Operating cash flow

($25.6 million)

($14.5 million)

N/A

Data source: Securities and Exchange Commission filings. 

While NextCure ended September with $184 million in cash, the company wisely took advantage of its soaring stock price to raise an additional $150 million in gross proceeds. That should be sufficient to get it through at least three important data readouts for its first three drug candidates by the end of 2021. By then, investors should have a much better idea of the real-world potential of NC318.

Keep this stock on your watch list 

NextCure is an intriguing biopharma stock to watch in the area of immuno-oncology. If the company finds success by inhibiting S15 or LAIR-1, then it could be harboring a blockbuster drug in its pipeline, especially considering that the immunomodulatory proteins are expressed in many different types of cancers. 

But right now, there's relatively little data for investors to lean on. While that doesn't rule out the potential for success, it's a reminder that this early-stage biopharma is risky for most investors. It should only comprise a small position in your portfolio or, safer yet, a spot on your watch list until more advanced results are available.