Nektar Therapeutics — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Nektar is a clinical-stage biopharmaceutical company whose revenue is primarily generated through collaborations, product supply, milestones and royalties.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $148.9 million | $81.2 million |
| Operating loss | $120.1 million | $141.2 million |
| Net loss | $162.0 million | $171.9 million |
| Net loss per share | $1.40 | $1.50 |
| Cash used in operating activities | $38.5 million | $129.8 million |
| Cash, cash equivalents and investments | $262.0 million | $302.2 million |
| Working capital | $159.7 million | $236.1 million |
- FY 2013 product sales were $44.8 million; cash royalty revenue was $1.1 million; non-cash royalty revenue tied to the sale of future royalties was $22.1 million; and license, collaboration and other revenue was $80.9 million.
- Product gross profit was $6.3 million, with a 14% gross margin, unchanged from 2012. Overall operations remained loss-making.
- Research and development expense rose 28% to $190.0 million, chiefly reflecting BEACON, NKTR-181 and other development activity; it included an $11.3 million charge for the SUNY settlement.
- At year-end, Nektar reported $125.0 million of 12% senior secured notes due July 2017 and approximately $160.8 million of indebtedness as defined by the company. A further $128.5 million liability related to the sale of future royalties is reported separately. Total liabilities were $524.4 million and stockholders’ equity was negative $89.9 million.
- Of the $262.0 million in cash and investments, $25.0 million was restricted. Nektar reported at least 12 months of liquidity for its current business plan. On January 28, 2014, it raised $117.2 million gross through an equity offering, before approximately $0.6 million of expenses.
- Operating cash use was substantially lower than in 2012, in part because Nektar received $135.0 million in collaboration milestone payments. The $70.0 million FDA-acceptance payment from AstraZeneca was recorded as a refundable liability, not revenue.
Fourth quarter: Unaudited Q4 2013 revenue was $31.1 million, operating loss was $35.9 million, and net loss was $47.7 million. Q4 2012 revenue was $21.1 million and net loss was $52.9 million.
Material changes versus 2012
- Revenue increased 83%, largely due to naloxegol regulatory milestones, Bayer’s Amikacin Inhale Phase 3 milestone, Roche supply activity and recognition of deferred Affymax revenue following termination of that agreement.
- Operating loss narrowed, but net loss remained substantial. Higher R&D spending was offset in part by increased revenue; non-cash interest expense on the royalty-sale liability and interest on the secured notes weighed on results.
- Cash and investments declined by $40.2 million, and working capital fell by $76.4 million. Nektar’s January 2014 stock offering subsequently added gross proceeds of $117.2 million.
- Cash royalty revenue continued to fall following the 2012 sale of future CIMZIA and MIRCERA royalty rights. Related royalties still appear as non-cash revenue, with a corresponding royalty-sale liability and non-cash interest expense.
Pipeline, outlook and principal risks
- Naloxegol: AstraZeneca’s U.S. NDA was accepted for review, with a September 16, 2014 PDUFA date; applications were also filed in the E.U. and Canada. FDA review of cardiovascular safety requirements was unresolved. Nektar could receive a further $35 million if a pre-approval cardiovascular safety study is not required, and up to $140 million in launch milestones upon specified approvals and launches. If a pre-approval study is required, AstraZeneca may terminate rights and Nektar could face repayment or royalty offsets involving the $70 million refundable payment.
- Etirinotecan pegol: The Phase 3 BEACON breast-cancer trial completed enrollment of about 850 patients; the independent monitoring committee recommended continuing after an interim analysis. Nektar expected the trial to continue through early 2015 and estimated total third-party and direct-material costs of about $100 million over the trial, with $64.7 million incurred through 2013.
- NKTR-181: The Phase 2 chronic-pain trial missed its primary endpoint because placebo patients did not show the anticipated pain-score rebound. Nektar was assessing Phase 3 design with the FDA and expected to begin a Phase 3 study in mid-2014. The human abuse-liability study showed lower drug-liking scores than oxycodone, but clinical efficacy remains a key uncertainty.
- Other programs: Bayer began Phase 3 development of Amikacin Inhale; Baxter completed enrollment in the 146-patient BAX 855 Phase 3 study. NKTR-171 entered Phase 1 in January 2014. After elevated liver enzymes at the highest doses of oral NKTR-192, Nektar discontinued that formulation and returned the program to preclinical development for possible injectable use.
- Management expected 2014 product sales and cash royalty revenue to decrease substantially, product gross margin to decline, and R&D expense to be below 2013 but at or above 2012 levels. Capital spending was expected to rise, principally for Amikacin Inhale device manufacturing capability. Revenue and liquidity remained dependent on clinical outcomes, regulatory decisions, partner activity and milestone receipts.
- Customer concentration is significant: Roche, UCB, AstraZeneca and Bayer represented 28%, 21%, 17% and 10% of FY 2013 revenue, respectively. Nektar also cited drug-development failure, partner dependence, supply constraints, competition, intellectual-property disputes and financing needs as material risks.
- Contingencies and unusual items: A December 2013 SUNY settlement requires $12 million in future payments, including installments due in 2014–2017; Nektar recorded an $11.3 million discounted charge. A separate royalty-sale agreement is expected to require a $7 million payment in 2014 because a MIRCERA sales threshold was not expected to be met. OMONTYS was recalled after reports of serious hypersensitivity reactions, including three reported deaths, and Affymax terminated its agreement with Nektar.
The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2013.
Important facts for investors to verify
- FDA’s cardiovascular-safety requirements and the resulting effect on naloxegol approval, the $70 million refundable milestone, and potential further milestones.
- BEACON’s final overall-survival results, timing, and remaining costs, as well as the Phase 3 design and progress for NKTR-181 after its missed Phase 2 endpoint.
- Cash runway after the January 2014 equity offering, expected R&D and capital spending, and the restricted-cash and debt-covenant requirements.
- Partner-driven revenue outlook, particularly the forecast decline in product sales and cash royalties and the concentration of revenue among four partners.
- Scheduled SUNY settlement payments and the expected $7 million royalty-sale payment, alongside other liabilities, lease commitments and potential collaboration or indemnification obligations.