Nektar Therapeutics — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated results. Nektar is a research-based biopharmaceutical company developing candidates in oncology, immunology and pain; it reported one business segment.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $29.2m | $27.8m | $80.8m | $1,153.5m |
| Operating loss | $98.7m | $98.6m | $330.4m | Operating income $788.2m |
| Net income (loss) | $(98.8)m | $(96.1)m | $(327.2)m | $779.5m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(203.5)m | $835.8m |
- Q3 revenue increased 5% year over year, while the nine-month comparison fell 93%, principally because 2018 included $1,059.8m of BMS collaboration revenue recognized from the upfront payment.
- Q3 2019 R&D expense was $99.0m, down 4%; nine-month R&D was $324.2m, up 12%. Nine-month G&A rose 24% to $71.6m, with higher commercialization-readiness and stock-compensation costs cited.
- Product gross margin was 11% in Q3 versus negative 12% a year earlier; it was negative 8% for the first nine months versus negative 3%. Management expects full-year 2019 product gross margin to remain negative, mainly due to sales to a partner below fully burdened manufacturing cost.
- At September 30, cash and cash equivalents were $81.2m and marketable investments were $1,645.5m, totaling $1,726.8m, down from $1,918.2m at December 31, 2018. Current assets were $1,578.8m and current liabilities $125.4m.
- Senior secured notes had $250.0m principal outstanding, bear interest at 7.75%, and mature in October 2020. The notes require at least $60m of cash and investments. Nektar also reported $154.4m of operating lease liabilities, including $9.3m current.
- Stockholders’ equity was $1,488.7m; accumulated deficit was $1,751.3m. Basic and diluted loss per share for the nine months was $1.87.
Material changes, outlook and management commentary
- The 2019 nine-month loss and operating cash use contrast with 2018’s reported profit and cash generation, which included the BMS upfront payment and the $850m BMS share purchase. Nine-month 2019 operating cash use was $203.5m; investing activities provided $71.4m, principally reflecting investment maturities, and financing activities provided $18.4m.
- Management estimated available working capital would fund current business plans for at least the next 12 months. It expects operating cash use, excluding upfront, milestone and other contingent receipts, to increase in 2019 versus 2018, mainly due to R&D investment; capital expenditures were also expected to increase substantially due to facility improvements.
- Management expected 2019 product sales and royalty revenue to be broadly consistent with 2018, license and collaboration revenue to decline significantly, and R&D and G&A expense to increase. These are management expectations, not guarantees.
- NKTR-214 (bempegaldesleukin) development with BMS is a major investment and risk. Nektar cited registration-enabling studies in several cancer settings and an FDA Breakthrough Therapy designation for the combination with Opdivo in untreated unresectable or metastatic melanoma. Nektar’s annual development-cost share is capped at $125m under the described arrangement, subject to the agreement’s terms. Up to $1.43bn of BMS regulatory and commercial launch milestones remain contingent on future achievements.
- The FDA missed the assigned target action date for the NKTR-181 NDA and postponed its planned advisory committee meeting. Nektar said it was working with the FDA and anticipated a meeting within the following several months; approval timing and commercial potential remained uncertain.
- Other pipeline updates included ongoing Phase 1 development of NKTR-262, initiation of a Phase 1 study of NKTR-255, and initiation of Phase 1b studies of NKTR-358 in psoriasis and atopic dermatitis. Nektar said significant pipeline investment would continue.
- Risks include clinical and regulatory failure or delay, manufacturing and supply constraints, dependence on partners, uncertain milestone and royalty receipts, the need to build commercialization capabilities, and competition. Nektar disclosed securities class actions and derivative suits alleging misstatements related to NKTR-214 efficacy/safety and a manufacturing issue; the cases were at an early stage, and the company recorded no liability because it could not reasonably estimate a loss.
Important facts for investors to verify
- Whether NKTR-214 trials produce results sufficient to support regulatory filings and any related BMS milestone payments.
- The timing and outcome of FDA review and the advisory committee process for NKTR-181, including any effects on launch plans and financing needs.
- Cash and investment balances, operating cash burn, and the company’s plan to address the $250m notes due October 2020.
- Actual 2019 product margins, R&D and capital spending compared with management’s expectations.
- Developments in the disclosed litigation and any material changes in potential liabilities, collaboration economics, or manufacturing and supply risks.