Less than a year ago, Wall Street thought little of Neoleukin Therapeutics (NASDAQ:NLTX). The drug developer was valued at less than $80 million and had yet to advance a pipeline asset into clinical trials. But that has changed.

Shares of Neoleukin Therapeutics erupted in late 2019 and thrust the business to a market valuation of more than $600 million by the first day of July 2020. Analysts have warmed up to the company's pitch for its technology platform, which designs biologic drugs from scratch through a combination of rational design principles and machine learning. Although the small-cap stock has tumbled in the first two weeks of July, investors are eagerly awaiting the start of the pipeline's first clinical trial. 

Is Neoleukin Therapeutics a buy ahead of the upcoming milestone?

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What Neoleukin Therapeutics does

Neoleukin Therapeutics is developing a technology platform based on the concept of de novo protein design. What does that mean, exactly? 

The term "de novo" means "from scratch," while a "protein" is a complex biological molecule created from a combination of amino acids. All proteins are made of the same building blocks. In the context of drug development, though, the term "protein" refers not to the commonly known nutrient, but to a class encompassing catalytic enzymes and signaling molecules. 

The technology platform originated at the University of Washington, the world's leading institution for protein engineering. So, for investors aware of the lay of the land in synthetic biology, Neoleukin Therapeutics is off to a solid start. 

More specifically, the company is focused on designing proteins that mimic the function of natural immune-signaling proteins called cytokines, but offer improved efficacy and safety. For example, the lead drug candidate, NL-201, was designed to mimic the function of interleukin-2 (IL-2) while avoiding well-known toxicity concerns. 

Novartis (NYSE:NVS) learned the hard way the importance of not overlooking toxicity issues for the promising cytokine. The blue chip drug developer created a recombinant form of IL-2 years ago and earned marketing approval in advanced melanoma and advanced renal cell carcinoma. But the branded drug, called Proleukin, never overcame toxicity concerns. Despite original expectations for it to become a one-stop-shop blockbuster taking aim at a range of cancers, it has yet to top $100 million in annual revenue. Novartis offloaded the asset to Clinigen in early 2019.

Neoleukin Therapeutics thinks it has solved the toxicity issues of IL-2 while preserving the protein's immune-stimulating promise. The issue is that the natural cytokine binds to a common cell receptor called CD25, triggering a cascade of unintended effects. The company has designed NL-201 to have all of the functions of IL-2 -- except for the ability to bind to that receptor. 

That's the general idea behind all of the company's pipeline assets, although only the lead drug candidate has been named and identified. Will the de novo protein design approach result in commercialized products? 

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A few things for investors to keep in mind

Therapeutic proteins designed de novo offer promising potential. They tend to be smaller and provide improved stability compared to native proteins, which can translate to safer (fewer off-target effects) and more effective (longer duration of response) biologic drugs. And because they're designed from the bottom up, researchers can avoid including structures known to inhibit therapeutic activity. 

Still, there are a few things for investors to keep in mind. First, Neoleukin Therapeutics has limited data available to examine. The study held up in support of NL-201 was performed in mice (as are nearly all preclinical studies). That helps explain Wall Street's timid approach to the company, which is valued at a lowly $450 million. 

Second, the complexity of biology cannot be understated. It's easy to claim that cytokine mimetics like NL-201 could enable a new class of biologic drugs, but it might not be so simple. The reality is that many molecules have multiple roles that are seemingly contradictory. That includes IL-2, which can control inflammation (fighting cancer cells) or trigger inflammation (activating autoimmune disorders). In other words, an IL-2 mimetic that avoids binding to CD25 might avoid known toxicity concerns, but end up causing unacceptable inflammatory responses. 

Third, an abundance of patience is required. Neoleukin Therapeutics expects to initiate clinical trials for NL-201 by the end of 2020. While there's intriguing potential to study NL-201 and other cytokine mimetics in combination with other drugs, such as CAR T-cells, to enhance hypothesized anti-tumor effects, it's going to take a few years to get a quality look at the pipeline in action. The business should end July 2020 with roughly $200 million in cash. That's a relatively healthy amount, but there's a long road ahead.

Keep this biopharma on your watch list

The association with the University of Washington and the potential of cytokine mimetics make Neoleukin Therapeutics an intriguing biopharma. So, too, do the stock's recent plunge and the company's new market valuation of "only" $450 million. If the technology platform can attract a deep-pocketed partner with which to develop assets or combination therapies, then the stock would climb much higher. 

However, that's a pretty risky bet with the information available. Neoleukin Therapeutics is an early mover in the de novo design of proteins, but it is far from the only company pursuing such a strategy. More importantly, there's simply too little data to make an accurate assessment of the technical approach. 

Investors with a long-term mindset and an above-average tolerance for risk might be comfortable staking a small position in the business, but this biopharma stock isn't a great fit for most investors at this time. Keep it on your watch list instead.