When it was last covered in mid-May, few biotech investors questioned the valuation and prospects for Nektar Therapeutics (NASDAQ:NKTR) as shares held the $80 level. That changed in an instant when Nektar stock got gutted on Monday, June 4.

Such a quick drop is typical for any stock that rose by more than four-fold in under a year, but in the case of Nektar, investors are misinterpreting the clinical results.

Nektar Therapeutics’ nearly 42 percent drop on June 4 now implies a more than two-fold upside for investors. For the last seven months, analysts rated the stock a buy and have an average price target of $102.57. Four analysts reiterated a buy call and price targets ranging from $78 – $103.

Source: TipRanks

Different Valuations of Nektar Stock

SimplyWall.St’s fair value on NKTR stock is far more negative. The future cash flow value of the stock is just $31.67, but the site is not factoring the revenue potential for NKTR-181. On May 31, the company filed a U.S. marketing application for treating chronic low back pain for adult patients. Unfortunately, the drug is opioid-based and the risk for patients developing an addition could limit doctors writing prescriptions.

A few weeks ago, NKTR-214’s Phase 1/2 PIVOT study results posted on May 17 were weak. The benefits for patients suffering from advanced solid tumors were marginal, if any. The overall response rate (“ORR”) was only 52 percent (12 of the 23 patients) but the disease control rate was 78 percent.

But on June 4, Nektar and Bristol-Myers Squibb’s (NYSE:BMY) published official preliminary results for NKTR-214 that hurt investor confidence. BMY stock also fell ~ 3 percent on the day.

The good news is that they may start a Phase 3 registration trial in the third quarter. The ORR for Stage IV Metastatic Treatment-Naïve 1L Melanoma Patients was 85 percent. Of the 25 patients with PD-L1 status, the ORR was 42 percent. PD-L1 positive patients was 62 percent. Investors may review the entire ORR numbers in the press release.

Analysis of Preliminary Results

The market overreacted to the results because they were not mediocre at all. It just expected results that were too high. The market glossed over the results in a hasty way: efficacy may improve for patients who are on the drug for a longer period.

The study was designed for a median duration of just four months for the stage 2. Patients with Stage IV Metastatic Treatment-Naïve 1L Melanoma had 85 percent efficacy.

Investors should also note the small sample size of the studies. If the study had more patients enrolled, ORR would fall.

Drug Efficacy on Patients Takes Time

Since NKTR-214 is an immune-activating drug, it needs time to stimulate the immune system. Then the immune system must recognize the tumor as pathogenic. After that, it may trigger the cell death cycle, shrinking the tumor and then eliminating it.

Since the pathway is entirely new and unlike chemotherapy, it is understandable that markets mis-interpret the meaning behind the study’s numbers. Chemotherapy works differently because it targets the tumor, killing cells in the process. The tumor may or may not recur after that.

Valuation

From finbox.io, a 10Y DCF Growth Exit or EBITDA Exit model implies a fair value of over $110 a share for Nektar stock. If the company averages a 52% EBITDA margin in the next decade while revenue grows 31 percent, then Nektar Therapeutics getting gutted in a single day will prove overdone. In the next few days, time will tell if the stock’s fall created an entry point.

Disclosure: Author does not own Nektar stock.