Nektar Therapeutics — Q1 2014 Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed May 7, 2014. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using polymer-conjugate technologies and relies on collaborations, product supply, royalties, and financing for its revenue and operating capital. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $19.8 | $23.0 | Down 14% |
| Operating loss | $(36.4) | $(45.1) | Loss narrowed |
| Net loss | $(46.2) | $(55.1) | Loss narrowed |
| Net loss per share, basic and diluted | $(0.37) | $(0.48) | Improved |
| Research and development expense | $38.3 | $45.6 | Down 16% |
| Cash used in operating activities | $62.3 | $38.1 | Use increased |
Product sales and royalty revenue fell 51% to $5.9 million, primarily because of lower product demand from collaboration partners. Non-cash royalty revenue from the sale of future CIMZIA and MIRCERA royalties increased 31% to $5.8 million; license, collaboration and other revenue rose 25% to $8.1 million. Product gross margin was negative 34%, versus positive 4% a year earlier, reflecting reduced sales against manufacturing costs.
At March 31, 2014, cash and marketable securities totaled $309.1 million, including $25.0 million of restricted cash; cash and short-term investments excluding restricted cash were $284.1 million. Total current assets were $304.8 million and current liabilities were $79.3 million. Total liabilities were $496.8 million, compared with $524.4 million at year-end; stockholders’ deficit improved to $9.8 million from $89.9 million. The filing reports $164.2 million of indebtedness, including $125.0 million of 12% senior secured notes due July 2017. The separate $121.1 million royalty-sale liability is not expected to be settled in cash.
Cash and cash equivalents ended the quarter at $32.4 million, down $6.6 million. Investing activities used $58.2 million, principally reflecting investment purchases net of maturities. Financing provided $113.9 million, including $116.6 million net proceeds from a January public offering. Nektar estimated it had at least 12 months of working capital for its current plans.
Changes, outlook and management commentary
- Revenue declined year over year, while operating and net losses narrowed, aided in part by lower R&D expense. R&D declined mainly because of the timing of activity in the Phase 3 BEACON study and completion of the NKTR-181 Phase 2 study.
- Management expected 2014 product sales and royalty revenue to be substantially below 2013, non-cash CIMZIA/MIRCERA royalties to decrease marginally, and product gross margin to be breakeven to slightly negative. It expected full-year R&D expense to decrease versus 2013, but also said operating cash use excluding upfront and milestone receipts would increase, primarily due to development spending, particularly BEACON. Capital expenditures were expected to increase significantly to build manufacturing capability for Amikacin Inhale devices.
- Naloxegol, licensed to AstraZeneca, had completed Phase 3 trials and was under U.S. and European regulatory review. FDA consideration of cardiovascular safety and possible additional study requirements was a key uncertainty; an advisory committee meeting was tentatively scheduled for June 11–12, 2014. Approval could trigger recognition of a $70 million refundable milestone already received and a further $35 million milestone if no pre-approval cardiovascular study is required. If specified study requirements led AstraZeneca to terminate, Nektar could face repayment or royalty reductions; a post-approval study could reduce U.S. royalties.
- Etirinotecan pegol’s Phase 3 BEACON study continued after an interim review recommended continuation; enrollment was complete. NKTR-181’s Phase 2 trial missed its primary endpoint because the placebo group did not show the anticipated pain increase; management was evaluating Phase 3 design and expected to start a Phase 3 study in the second half of 2014. Bayer’s Amikacin Inhale and Baxter’s BAX 855 programs were also in Phase 3. Nektar initiated a Phase 1 study of NKTR-171 in January 2014.
- The January offering issued 9.775 million shares and generated approximately $117.2 million after underwriting discounts and commissions, plus approximately $0.6 million in other offering costs. Outstanding shares increased to 126.9 million at March 31 from 116.5 million at year-end.
- Key risks include clinical and regulatory failure or delay, reliance on collaboration partners, uncertain milestone and royalty receipts, substantial ongoing R&D needs, limited committed financing, manufacturing and single-source supplier risks, intellectual-property and contractual disputes, and debt covenants. Management warned that further financing could be required if milestone or collaboration proceeds do not materialize; equity financing could dilute shareholders.
Unusual items and contingencies
- The $70 million AstraZeneca payment remains recorded as a liability because it is potentially refundable, rather than recognized as revenue.
- Royalties sold to RPI are still reported as non-cash revenue, with an associated liability and non-cash interest expense. Nektar paid RPI $7.0 million in March 2014 because MIRCERA sales missed specified thresholds and stated that no further payments under that provision were then expected.
- The 12% notes require a $25 million segregated cash reserve through July 1, 2015 and impose other financial and operating covenants. The reserve is included in reported cash and investments but is restricted.
- The filing describes a December 2013 SUNY litigation settlement requiring $12 million in future installments. It also discloses broad collaboration and transaction indemnification obligations for which the maximum potential payment cannot be reasonably estimated; no liability was recorded for those indemnities.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to contractual obligations were reported.
Important facts for investors to verify
- FDA decisions on naloxegol cardiovascular-safety requirements, approval timing, the potential $70 million liability release, the additional $35 million milestone, and any repayment or royalty-reduction consequences.
- Progress and results from the BEACON Phase 3 study and the design, timing, and cost of NKTR-181 Phase 3 development.
- Actual 2014 product demand, revenue mix, manufacturing margins, R&D spending, and capital expenditures versus management’s expectations.
- Quarterly operating cash use and the availability of cash for planned clinical programs, including the effects of restricted cash, debt covenants, and any need for additional financing.
- Collaboration-partner execution, potential milestone and royalty receipts, and the status of material litigation, settlement payments, and indemnification exposures.