Few stocks have been as red-hot in the past year as gene-editing plays such as Kite Pharmaceuticals (NASDAQ:KITE), a clinical-stage biotech researching immuno-oncology drugs that reengineer a patient's immune system to better battle cancer. Kite's shares have more than doubled since the company IPO'd last fall, but recently, shares have taken a drubbing over concern that its approach may pose a safety risk.
This week, Kite held court with investors to assure them that's not the case, yet despite Kite's hand-holding, investors still hit the sell button. Here's why.
Odds are stacked against it
Imagine being able to provide your immune system GPS coordinates to otherwise-hidden cancer cells so that it can find and destroy them without the use of toxic chemotherapy and you begin to get a gist of just how revolutionary chimeric antigen receptor T-cell, or CAR-T, immunotherapies could be.
The only problem is that -- for now -- the efficacy of CAR-T therapies being developed by the likes of Kite is more promise than proof.
Kite's most advanced CAR-T therapy is KTE-C19 for the treatment of CD19 expressing refractory aggressive non-Hodgkin's lymphoma patients who have failed prior chemotherapy treatments -- a population with a significant unmet need for new treatment options.
However, KTE-C19 is only in phase 1 human studies -- the earliest stage -- and the number of people participating in its trial is measured in the low double digits, which is hardly a large enough patient population to draw any definitive conclusions over KTE-C19's efficacy or safety.
That said, KTE-C19 is undeniably showing promise in those patients. In fact, Kite announced last fall that eight patients with B-cell cancer experienced complete remission and that four others experienced a partial remission. That's a pretty astonishing feat, particularly given how heavily pre-treated these patients were.
Regardless, early-stage findings are far from reliable indicators of whether a drug will succeed in larger, later-stage trials and eventually win over regulators for approval.
Historically, 93% of cancer drugs entering phase 1 trials end up in lab waste baskets instead of on the market, including as many as 40% of those that fail in phase 3 trials, typically the final stage of evaluation prior to submitting an application for approval.
A lofty valuation and a long road ahead
Although Kite has reassured investors that phase 1 enrollment is on track and that a death occurring early on in the trial wasn't related to KTE-19, the need for such reassurances serves as an important reminder to investors of just how risky it is to invest in emerging biotech.
Prior to concerns percolating surrounding KTE-C19's safety, investors were awarding Kite a valuation north of $3.5 billion and even now after Kite's fallen from a peak above $80 earlier this year, its market cap still stands at $2.4 billion -- an arguably heady valuation for a company with a clinical pipeline as immature as Kite's.
Of course, that valuation could be incredibly reasonable in retrospect if KTE-C19 ends up delivering the goods in trials, but there's still a lot of work to be done, including phase 2 trials, which are set to kick off this year and from which data should be available in 2017.
If that mid-stage data is good, then Kite could conceivably be able to file for conditional approval before conducting phase 3 studies. However, if there are any hints that KTE-C19 isn't safe, then the FDA may be reluctant to approve KTE-C19 early and for that reason, investors could be reining in optimism in case their accelerated timeline thesis fails to pan out.
Overall, CAR-T therapies like Kite's could be game-changing, but it's far too early to declare victory and because of that, Kite remains a biotech stock that is best suited for only the most risk tolerant of investors.