Nektar Therapeutics — Q3 2017 Form 10-Q
Business context and period. Nektar is a research-based biopharmaceutical company developing drug candidates and earning revenue from collaboration, licensing, manufacturing, and royalties. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and liquidity
- Q3 revenue: $152.9, up from $36.3. The increase was primarily the $127.6 of revenue recognized from the Lilly NKTR-358 agreement. Lilly paid $150.0 upfront; $22.4 remained deferred at quarter-end.
- Q3 earnings: Operating income was $69.5 and net income was $60.9, or $0.39 basic and $0.37 diluted per share. In Q3 2016, Nektar reported operating and net losses of $32.9 and $43.2, respectively.
- Nine-month results: Revenue was $212.2, up 66% from $128.0. Operating loss was $35.6 versus $80.7; net loss was $62.9 versus $111.3. The year-to-date results remained loss-making despite the Lilly payment.
- Revenue mix: Nine-month product sales fell 40% to $24.9, while cash royalty revenue rose 82% to $24.0. Non-cash royalty revenue from previously sold CIMZIA and MIRCERA royalties was $21.4, compared with $22.3 in 2016.
- Costs and margins: Nine-month R&D expense rose 22% to $187.0 and G&A rose 27% to $40.0. Product gross margin was 16% for the nine months, down from 43%; Q3 product gross margin was negative 28%, versus 52% a year earlier.
- Cash flow: Operating cash use was less than $0.1 for the nine months, compared with $64.6 used in 2016. Management said this included $146.8 of net operating cash uses and $161.4 of milestone and contingent receipts, including Lilly’s $150.0 upfront payment. Investing activities used $51.8, financing provided $30.1, and cash declined $21.7 to $38.0.
- Liquidity and debt: Cash and marketable securities totaled $412.2, including $59.6 of long-term investments; working capital was approximately $290.3. Debt was $253.0, including $250.0 principal of 7.75% senior secured notes due October 2020 and $3.0 of capital leases. The notes require at least $60.0 of cash and investments.
- Other obligations: The future-royalty liability was $98.4. The new Mission Bay lease runs through January 2030 and carries disclosed minimum future operating lease payments of $107.1.
Material changes and developments
- The Lilly agreement for NKTR-358, effective August 2017, provided a $150.0 upfront payment and potential additional development and regulatory milestones of up to $250.0. Lilly bears 75% of Phase 2 costs; Nektar may elect to contribute to Phase 3 costs in exchange for higher potential royalties.
- For ONZEALD (NKTR-102), the European Medicines Agency committee issued a negative opinion on conditional marketing authorization. Nektar requested re-examination; if the appeal fails, the company may owe Daiichi Sankyo $12.5, already recorded as a liability.
- After Ophthotech’s Fovista Phase 3 studies failed their primary endpoints, Nektar terminated its agreement with Ophthotech on October 27, 2017. Nektar expected to recognize the remaining $18.0 of related deferred revenue in Q4 2017. Lower Ophthotech demand was a major factor in declining product sales.
- Nektar settled the Enzon licensing dispute for $7.0; the case was dismissed with prejudice. The settlement included a $3.5 payment in June 2017 and a remaining $3.5 due in January 2018.
- Nektar extended its San Francisco Mission Bay lease from 2020 to 2030 and agreed to rent approximately 24,000 additional square feet at specified future dates.
Outlook, management commentary, and risks
- Management estimated available working capital would fund current plans for at least 12 months, but stated that Nektar had no credit facility or other committed capital. Continued R&D investment, collaboration receipts, partner sales, clinical outcomes, and financing access affect that outlook.
- Management expected 2017 revenue to increase significantly versus 2016 due to Lilly; royalty revenue to increase with MOVANTIK, MOVENTIG, and ADYNOVATE sales; and R&D and G&A expenses to rise. It expected product gross margin to decline significantly and potentially approximate breakeven for full-year 2017.
- NKTR-214 combination-study dose escalation was completed, a Phase 2 dose identified, and dose expansion enrollment underway. NKTR-181 had positive Phase 3 efficacy and human abuse-potential study results; Nektar was seeking a partner for further development and commercialization.
- Management expected topline results from Bayer’s Amikacin Inhale Phase 3 program before year-end 2017. Bayer had also filed an NDA for Cipro DPI, with an FDA advisory committee meeting scheduled for November 2017.
- Key risks include clinical or regulatory failure and delays, dependence on collaboration partners for development and commercialization, variable milestone and royalty revenue, manufacturing and single-source supply issues, intellectual-property litigation, and the ability to obtain additional capital. Senior-note covenants restrict certain actions and include the minimum-liquidity requirement.
- The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the apparent earnings and near-zero operating cash use reflects the one-time Lilly upfront payment, and what is the underlying operating cash burn?
- Whether ONZEALD’s CHMP re-examination succeeds and whether the potential $12.5 Daiichi payment becomes payable.
- Whether the anticipated Q4 recognition of Ophthotech-related deferred revenue occurred, and how the termination affects future product sales and manufacturing economics.
- Progress and costs for NKTR-214, NKTR-358, NKTR-181, and partnered late-stage programs, alongside partner sales of royalty-bearing products.
- Compliance with the senior-note liquidity covenant, future financing needs, and the financial impact of the long-term lease commitments.