Nektar Therapeutics (NASDAQ:NKTR)

Total speculation on pain kill and cancer drug.

It kind of hurts to drop a red thumb on Nektar, a former favorite of mine and a big CAPS green thumb loser. On the other hand it's good to remind myself that in biotech, cheap stocks get cheaper. In October 2010 Nektar's share price nearly touched 16 following the release of encouraging phase II data for PEGylated irinotecan NKTR-102 in ovarian cancer and breast cancer. The previous year, Nektar had pulled off a surprisingly remunerative partnership with AstraZeneca for PEGylated naloxol NKTR-118 and the market was clearly anticipating another major deal for NKTR-102.

When Nektar announced they would be proceeding to phase III trials of NKTR-102 without a partnership, the share price began a steep decline that continued virtually unabated for over a year. The price dropped back down below 12, the level it had been at after the first good data on NKTR-102 came out. Then it dropped through 10, where it had jumped on the AstraZeneca deal. Ultimately it dropped as low as 4.23, the lowest level since the broad market declines of early 2009. The company was being valued as though NKTR-102 and NKTR-118 essentially didn't exist.

In fairness, some dilution meant that a share price of 4.5 in 2009 meant a market cap about 50M lower than a market cap of 4.5 in 2011. On the other hand the company has a net asset balance of 230M today versus 120M in 2009. The stock has enjoyed a moderate rebound of late, slipping above the 5 mark and thereby garnering my red thumb.

I could easily go back down a hundred points on this pick in a month. Nektar is a loose cannon, wildly careening from exaggerated highs to hopeless depths, amidst a seeming inability of the street to judge the potential of their pipeline. A similar phenomenon occurred with Savient last year, and I was similarly fooled although in that case it cost me a substantial chunk of change. NKTR-102 and NKTR-118 are now enrolling phase III trials, but significant data is unlikely from either trial before late 2012. That's a lot of time for Nektar's share price to settle back to the pessimistic depths as investors keep speculative stocks at arm's length. If I'm wrong once again and the share price shoots back skyward, the pick will serve as a reminder not to judge a stock's valuation by what its price was a few months ago.