Kite Reassures Investors, Yet Shares Slip -- What Gives?

Few stocks have been as red-hot in the past year as gene-editing plays such as Kite Pharmaceuticals , 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 itImagine 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 aheadAlthough 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 retrospectif 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.

The article Kite Reassures Investors, Yet Shares Slip -- What Gives? originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.