Nektar Therapeutics — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Dollar amounts below are in millions unless otherwise noted. Nektar is a clinical-stage biopharmaceutical company developing drug candidates using its polymer-conjugate technologies and relies principally on collaborations, product supply and financing to fund operations.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $33.9 | $23.7 | $56.9 | $41.6 |
| Operating loss | $(32.6) | $(27.0) | $(77.7) | $(64.9) |
| Net loss | $(42.7) | $(34.3) | $(97.8) | $(75.4) |
| Net loss per share | $(0.37) | $(0.30) | $(0.85) | $(0.66) |
| Operating cash used | — | — | $(72.4) | $(55.2) |
- Revenue mix: Six-month product sales were $22.1 million, cash royalty revenue $0.7 million, non-cash royalty revenue related to sold royalty rights $8.2 million, and license, collaboration and other revenue $25.8 million. The non-cash royalty line is recognized although CIMZIA and MIRCERA royalties are remitted to the royalty purchaser.
- Margins and expenses: Product gross margin was 51% in Q2 and 25% for the first half, versus 26% and 4%, respectively, in 2012. Mix and lower manufacturing overhead per unit drove the improvement. First-half R&D rose 43% to $97.8 million, principally reflecting etirinotecan pegol’s Phase 3 BEACON study and NKTR-181 development. G&A declined 3% to $20.1 million.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $201.9 million at June 30; another $25.0 million was restricted, bringing cash and investments to $226.9 million. Current assets were $234.4 million and current liabilities $90.3 million. Management said resources were sufficient for at least 12 months of current plans, while cautioning that spending and receipts could vary.
- Debt and equity: The company reported $147.7 million of indebtedness, including $125.0 million of 12% senior secured notes due July 2017; this excludes the royalty-sale liability. The balance sheet showed a $124.1 million long-term liability from the royalty sale and stockholders’ deficit of $40.5 million. Six-month interest expense was $9.3 million, plus $11.0 million of non-cash interest on the royalty-sale liability.
Changes versus the prior comparable period
- First-half revenue increased 37%, led by higher product sales, collaboration revenue and non-cash royalties. Collaboration revenue included a $10.0 million Bayer milestone following initiation of a Phase 3 Amikacin Inhale study.
- First-half net loss widened by $22.4 million. Higher R&D and interest costs outweighed increased revenue; higher interest expense reflected the 12% notes issued in July 2012 and the accounting accretion on the royalty-sale liability.
- First-half operating cash use increased $17.2 million year over year. Cash and investments declined $75.3 million from December 31, 2012, despite $90.3 million of net investing cash inflow, largely reflecting investment maturities and purchases, and a $3.0 million royalty-threshold payment.
Outlook, developments and risks
- Management expected 2013 product sales to be slightly higher than 2012, but lower in the second half than in the first half; full-year product gross profit and margin were expected to be modestly positive. R&D was expected to increase in the second half and significantly exceed 2012 for the year. Management also expected full-year license, collaboration and other revenue to increase, primarily from milestones, and cash royalty revenue to decrease while non-cash royalties increased.
- After quarter-end, AstraZeneca agreed on August 8, 2013 to submit naloxegol applications to the FDA and EMA in September. Acceptance for review could trigger $70 million and $25 million milestones, respectively; these payments were not reported as received in this quarter. The FDA cardiovascular-safety decision creates material uncertainty: depending on the decision and AstraZeneca’s election, a $70 million FDA milestone could be subject to repayment or royalty reductions, and U.S. royalties could be reduced if a post-approval study is required.
- Etirinotecan pegol’s BEACON Phase 3 study completed enrollment in late July, after quarter-end, and was expected to require substantial investment. Nektar cited clinical and regulatory failure, trial delays, partner decisions, manufacturing and single-source supply constraints, and the need for future financing as key risks. It had no committed credit facility and said it might need financing if the naloxegol milestones or new collaboration funding did not materialize.
- Affymax and Takeda recalled all OMONTYS lots in February 2013 following reports of serious hypersensitivity reactions, including potentially fatal reactions. Affymax transferred responsibilities to Takeda effective April 1; Affymax terminated its Nektar agreement in July 2013. Nektar planned to assess the effect on $6.8 million of deferred revenue.
- Nektar paid RPI $3.0 million in 2013 because the 2012 MIRCERA sales threshold was not met. It could owe up to $7.0 million in 2014 if the specified 2013 threshold is not met. The SUNY licensing dispute resulted in a $3.0 million accrued liability, including interest, after a May 2013 court ruling on one milestone; Nektar disputed the claim and expected trial in the first half of 2014.
Most important facts for investors to verify
- Whether FDA and EMA accept the naloxegol applications for review, the resulting milestone receipts, and any cardiovascular-safety requirements or repayment exposure.
- Cash burn and financing needs as BEACON and other development programs advance, especially if expected milestone or collaboration proceeds are delayed or not received.
- Clinical and regulatory progress for etirinotecan pegol, Amikacin Inhale, BAX 855 and NKTR-181, including trial outcomes and development costs.
- The outcome of the SUNY litigation and the 2013 MIRCERA sales threshold, including any resulting cash payments.
- The financial impact of the OMONTYS recall and agreement termination on deferred revenue and future product sales or royalties.