With shares of Nkarta (NKTX -6.42%) up by 131%, April 25 was a great day to be a shareholder of this little-known biotech. Thanks to some great news from a pair of its early-stage clinical projects, this company is officially on the map, though it still has a very long way to go before commercializing any of its medicines in development.
Still, with such a resoundingly optimistic response from the market, buying a few shares of the stock is a tantalizing prospect. Let's take a beat to think about whether it could be a smart move for your portfolio, too.
Image source: Getty Images.
Why this stock is exploding
Nkarta is a typical pre-product biotech company that's dedicated to developing therapies using bioengineered natural killer (NK) cells. On that note, Nkarta is unprofitable, and it has no revenue to speak of, nor will it have revenue anytime soon. But it's possible that those are temporary issues.
On April 25, it reported preliminary results from a pair of its phase 1 clinical trials for its candidates called NKX101 and NKX019. NKX101 aims to treat relapsing acute myeloid leukemia (a form of blood cancer), whereas NKX019 seeks to help patients with refractory B cell malignancies like aggressive diffuse large B cell lymphoma (DLBCL). Results indicate that 60% of the patients in the NKX101 trial and 50% of the people in the NKX019 trial experienced a complete response to treatment.
To put those results into context, there's no other medicine that fills the same niche as NKX101, though there are other therapies that treat the B cell malignancies targeted by NKX019. That means there's a decent chance that NKX101 will be able to get a fast-tracked designation of some sort from regulators, assuming the company applies for it.
That makes these results all the more exciting.
This business is primed to keep advancing its pipeline
Savvy biotech investors know that there's more to picking winners than buying shares of companies that recently released positive clinical trial results.
Both the financial position of the company and its ability to raise enough funding to continue with research and development (R&D) work are key. Here, there isn't any near-term trouble to speak of:
NKTX Research and Development Expense (Annual) data by YCharts.
For Nkarta, its total debt of only $12.4 million doesn't raise any eyebrows, and its $238 million in cash should be more than sufficient to continue work on its pipeline, given 2021's total expenditures of $86.4 million.
Furthermore, as shown below, it doesn't have many shares outstanding compared to some of its small-cap biotech peers.
NKTX Market Cap data by YCharts.
That means management has plenty of leeway to take out new debt or issue new shares without threatening shareholder value as much as it might otherwise.
And that's exactly what it did on April 25 to take advantage of its stock's huge run-up by holding a new public offering of more than 13.3 million shares that in total are worth around $200 million. Once the offering closes on April 28, it'll leave its total number of shares outstanding at 46.3 million, which is still quite concentrated.
So, for an early-stage biotech company, Nkarta's finances are in quite good shape, and it's reasonable for investors to expect that it will have enough resources to continue advancing its flagship pipeline program for at least a year or two. When cash reserves run low, it shouldn't have much problem securing more, barring any negative clinical trial results that'd dissuade lenders.
That's key, as most of its pipeline is decidedly immature. It only has five disclosed programs, and only two of those are clinical-stage. Right now, the biotech probably has enough money to initiate another major project if management desires.
Keeping things in context
The results that Nkarta reported are good news for patients and shareholders alike, but it's important not to put too much weight into them.
Both sets of positive results are from preliminary data derived from the earliest stage of clinical trials. Though it's great that there weren't any life-threatening side effects in the trials so far, that doesn't mean there won't be in the future. Nor does the data mean that investors can be confident in the efficacy of the therapy candidates, as overwhelmingly positive as it may seem at the moment.
In other words, this is still a highly risky pre-product biotech stock. There are years of work that need to be done in the clinic ahead of the company making a single dollar via sales of a drug. And once again, there is no guarantee of success. If the risk of losing your entire investment on the basis of unexpectedly poor clinical trial results frightens you, please don't buy this stock.
The standard biotech disclaimers aside, Nkarta is doing some very exciting stuff, to be sure.
If its dreams can be realized, it'll be worth billions, and the people who invested in it today will be quite rich. For investors seeking a very speculative bet, Nkarta is a great option. For everyone else, it's probably a better idea to wait until its lead programs are at least finished with their phase 1 trials, which could occur toward the end of this year.
