Up by 32% in the past three months, Caribou Biosciences (CRBU -1.33%) is a pre-revenue biotech stock with explosive potential. Per some new data released on July 13, its candidate to treat lymphoma might be a massive winner in the making. 

But early stage biotechs are seldom investments that make for a good night's sleep, and Caribou is no exception. Let's examine whether the balance of risk and reward is tilted in favor of buying this stock and holding it for the next five years.

Great data and plenty of cash in hand

Caribou Biosciences just published some absolutely thrilling data from one of its programs, CB-010. CB-010 is being developed to treat relapsed or refractory non-Hodgkin's lymphoma that wasn't addressed by two or more prior treatments. According to the phase 1 trial results, 69% of the study's 16 patients experienced a complete response to the therapy. That means their cancer was no longer detectable. And for 44% of the participants, after six months and counting since treatment, that was still the case as of mid-July.

It's hard to overstate how impressive those results are. Remember, all the patients in the study had cancers that were aggressive enough that at least two previous interventions failed. What's also great is that CB-010's associated side effects were overwhelmingly acceptable, given the grave nature of a cancer diagnosis. In comparison to chemotherapy, its side effects -- like a low platelet count and contracting opportunistic infections -- look favorable.

In fact, the therapy caused serious side effects at significantly lower rates than a few competing therapies already on the market, such as Gilead Sciences' therapy Yescarta for relapsed or refractory large B-cell lymphoma. When it comes to promising early stage oncology data, it simply doesn't get any better than this.

As of the first quarter, Caribou had $228 million in cash, equivalents, and short-term investments. It bolstered that by initiating a new stock offering on July 13, which should raise an additional $125 million. The offering caused its stock to drop by 22%, but given its total annual expenses of $120 million in 2022, it should have enough of a cash runway to last it through roughly the middle of 2026.

Furthermore, given that CB-010 has been granted both the Fast Track and the Orphan Drug designations by the U.S. Food and Drug Administration (FDA), that should be plenty of time to advance the program through at least a few mid-stage data readouts. If those readouts are as good as the early stage data, investors are in for a treat as the program could be approaching completion by 2028.

At the same time, if the program encounters a problem in the next year and a half or so, Caribou likely has enough money to try to address it without cutting research and development (R&D) costs. For a biotech, that's quite good as it mitigates some of the most serious risks of an investment. 

Be careful about getting too exuberant 

As favorable as Caribou's early stage data is, it's critical to keep its context in mind when you're deciding whether to invest or not. Programs that perform well in phase 1 clinical trials very frequently go on to disappoint in later trials, where their efficacy and dosages are both under the microscope, typically with bigger cohorts of patients.

Cancer-targeted programs are especially susceptible, given that cancers can switch between remission and progression, making earlier results look less rosy. Likewise, this company only has two clinical-stage candidates, so it doesn't presently have too many attempts at commercialization lined up for five or so years down the line. That could change, but it could also get worse if a fundamental problem with its approach is unearthed. 

And no matter what, between now and the end of the decade, Caribou will need to raise more money. With roughly $27 million in debt right now, taking out more loans won't be a major problem. But investors should probably expect the biotech to issue more shares of its stock at some point before 2027, which will cause their stakes to get diluted.

Still, if Caribou can follow through and eventually commercialize CB-010 for at least one of the indications it might be useful for, it wouldn't be surprising at all if it multiplied in value by several times compared to today.

For what it's worth, I've absolutely never invested in any biotech stock on the basis of phase 1 data before -- until now. There's a solid chance that I'll lose my shirt as a penalty for breaking my own rule, but the odds look a lot more favorable than with the opportunities that I've seen before.