Nektar Therapeutics — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars unless noted. Nektar is a clinical-stage biopharmaceutical company whose revenue is primarily derived from partner collaborations, product supply and royalties.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $23.7 | $17.3 | $41.6 | $28.6 |
| Operating loss | $(27.0) | $(34.3) | $(64.9) | $(68.1) |
| Net loss | $(34.3) | $(36.4) | $(75.4) | $(72.4) |
| Basic and diluted loss per share | $(0.30) | $(0.32) | $(0.66) | $(0.65) |
| Operating cash flow | Not presented separately | Not presented separately | $(55.2) | $(49.7) |
- Q2 revenue rose 37%; six-month revenue rose 45%. Product sales and royalties increased 22% in Q2 and 49% for the half-year. License, collaboration and other revenue increased 62% and 41%, respectively.
- Q2 product gross margin was 46%, versus 26%; six-month margin was 33%, versus 28%. Management attributed the improvement to royalty growth, product mix and lower per-unit manufacturing costs. Margins may fluctuate with order volume and mix.
- Six-month R&D expense was $68.3 million, up 9%; G&A was $20.7 million, down 10%. Six-month interest expense increased to $12.3 million from $5.2 million, mainly reflecting imputed interest on the royalty-interest sale.
- Cash, cash equivalents and marketable investments totaled $477.1 million at June 30, compared with $414.9 million at December 31, 2011. Current assets were $468.3 million and current liabilities $276.9 million.
- At June 30, reported indebtedness was $239.0 million, including $215.0 million of convertible subordinated notes due September 28, 2012. Total liabilities were $536.2 million; stockholders’ equity was $132.3 million.
Material changes and unusual items
- In February 2012, Nektar received $124.0 million from selling future CIMZIA and MIRCERA royalty rights to RPI. Because of continuing manufacturing obligations, the proceeds were recorded as a liability, not as a sale gain. Nektar continued to recognize royalty revenue, while royalties from first-quarter 2012 sales were remitted to RPI. The liability was $127.7 million at June 30; its estimated effective interest rate was approximately 17%.
- Q2 collaboration revenue included recognition of $3.9 million of deferred revenue after Baxter elected to cease future Hemophilia B research activities. For the six months, Nektar recorded a $1.7 million impairment charge on a Huntsville research building and related land; no additional impairment was recorded in Q2.
- Six-month net cash used in operating activities was $55.2 million. Investing activities provided $56.2 million, principally reflecting net investment maturities, and financing activities provided $119.8 million, primarily from the royalty transaction.
- After quarter-end, on July 11, Nektar issued $125.0 million of 12% senior secured notes due July 2017 and exchanged $42.5 million of the existing convertible notes for the same principal amount of new notes. It received $82.5 million before approximately $4.3 million of transaction costs; $25.0 million must remain in a reserve account through July 1, 2015. Management intended to use proceeds and existing cash to repay the remaining $172.5 million of convertible notes at maturity.
Outlook, risks and contingencies
- Management expected R&D spending to increase through the rest of 2012, including investment in the NKTR-102 Phase 3 BEACON study; G&A was expected to decrease slightly versus the comparable 2011 period. Cash use from operations was expected to increase with R&D spending. Management expected royalties to increase during 2012 compared with 2011.
- Management stated that available cash and investments were expected to cover anticipated cash needs for at least 12 months and that repayment of the convertible notes would leave several years of working capital for current plans. It cautioned that forecasts depend on development outcomes, spending, receipts and contingent liabilities; Nektar had no committed credit facility and did not anticipate a substantial upfront transaction in the near term.
- Key clinical and commercial dependencies include AstraZeneca’s NKTR-118 Phase 3 KODIAC results, then expected in Q4 2012; successful development and potential filing could trigger $95 million in milestones, with further milestones tied to approvals and launch. Nektar also expected substantial investment in NKTR-102 and anticipated an Amikacin Inhale Phase 3 start in Q1 2013, subject to device manufacturing and stability work.
- Risks include clinical-trial failure or delay, regulatory uncertainty, reliance on partners, manufacturing and single-source supply constraints, competition, and the need for future capital. The new secured-note indenture imposes operating restrictions and cash-reserve/liquidity covenants; noncompliance could trigger default.
- Nektar disputed SUNY’s contract claims; the filing stated that a possible loss could not be reasonably estimated and no liability was recorded. The company also disclosed broad, unquantifiable indemnification obligations under commercial agreements.
Important facts for investors to verify
- Whether the planned repayment of the remaining $172.5 million convertible notes was completed and how the 12% secured debt affects future interest expense, liquidity and covenant headroom.
- KODIAC results, regulatory filing timing and any resulting NKTR-118 milestone or royalty prospects.
- BEACON trial progress and cost, and whether Amikacin Inhale device work supports the projected Phase 3 timing.
- Performance of CIMZIA and MIRCERA royalties, RPI-related liability estimates and possible sales-threshold payments to RPI.
- Developments in the SUNY litigation and any other material claims or indemnification exposures.