Nektar Therapeutics — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited results; financial amounts below are in U.S. dollars unless noted. Nektar describes itself as a clinical-stage biopharmaceutical company developing drug candidates using PEGylation and polymer-conjugate technologies.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $11.3 million | $33.2 million |
| Product sales and royalties | $4.8 million | $3.6 million |
| License, collaboration and other revenue | $6.5 million | $29.7 million |
| Research and development expense | $30.2 million | $23.3 million |
| General and administrative expense | $11.7 million | $9.0 million |
| Operating loss | $33.9 million | $3.4 million |
| Net loss | $36.0 million; $0.33 per share | $6.1 million; $0.07 per share |
| Net cash used in operating activities | $14.9 million | $34.2 million |
| Cash, cash equivalents and short-term investments | $518.6 million at March 31 | $315.9 million at December 31, 2010 |
| Total liabilities | $423.2 million at March 31 | $430.6 million at December 31, 2010 |
Product gross profit was $1.5 million, with a 32% product gross margin, compared with a $0.7 million product gross loss and negative 20% margin in Q1 2010. Nektar reported $240.6 million of indebtedness at March 31, including $215.0 million of 3.25% convertible subordinated notes due September 2012, $18.5 million of capital lease obligations and $7.1 million of other liabilities. Management said available cash and investments were expected to cover anticipated cash needs for at least 12 months, but also said the company did not have sufficient resources to fund current R&D plans and repay the notes.
Changes versus the prior comparable period
- Revenue fell 66%, primarily because Nektar had fully amortized the $125.0 million AstraZeneca upfront payment by December 31, 2010. It recognized $25.3 million from that payment in Q1 2010 and none in Q1 2011.
- Product sales and royalties rose 34%, with reported increases of about $0.6 million each in product sales and royalties.
- R&D expense rose 30%, reflecting expanded pipeline and clinical investment, including NKTR-181 trial initiation, higher staffing and facilities costs, and increased stock-based compensation. G&A expense also rose 30%.
- Operating cash use improved year over year, but the quarter’s cash increase was primarily supported by equity financing: net financing cash flow was $221.5 million, including $222.0 million net proceeds from common-stock issuance. Investing cash flow was a net use of $201.9 million, largely reflecting purchases of short-term investments.
Outlook, management commentary and risks
- Pipeline: AstraZeneca announced the first-patient enrollment in a Phase 3 NKTR-118 study in March 2011. Nektar expected Bayer’s Amikacin Inhale Phase 3 study to start in the second half of 2012, subject to completing nebulizer design and manufacturing work. NKTR-102 Phase 2 studies continued; Nektar was developing Phase 3 plans and anticipated substantial investment over several years. It expected R&D expense to increase through 2011 and operating cash use to rise during the remainder of the year compared with the corresponding 2010 period.
- Funding and debt: Nektar planned to explore alternatives, including restructuring its 2012 notes, and warned it might need additional capital or partnership transactions. It said it did not anticipate substantial upfront transactions in the near future. If funding or restructuring were unavailable on acceptable terms, it could delay or reduce NKTR-102 Phase 3 trials or cut costs.
- Revenue uncertainty: Revenue depends on collaborations, partner performance, manufacturing demand, royalties and milestone timing; results may fluctuate significantly. Potential future development milestones under partner agreements totaled approximately $183.8 million as of January 1, 2011, including $60.0 million from Bayer. A further $235.0 million under the AstraZeneca agreement was contingent on development activities performed solely by AstraZeneca. These are contingent potential payments, not assured revenue.
- Key risks: Clinical and regulatory failure, delays and costs; reliance on collaboration partners and third-party manufacturers; single- or limited-source suppliers; manufacturing scale-up and device-design challenges for Amikacin Inhale; the need to refinance or repay the notes; competition, intellectual-property disputes and possible indemnification obligations. Nektar reported no liabilities recorded for its described commercial-agreement indemnification obligations. Litigation outcomes were characterized as unpredictable.
- Accounting and controls: Nektar prospectively adopted updated standards for multiple-element and milestone revenue recognition in 2011; adoption did not affect Q1 results, but may change revenue timing for future arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, design, timing, cost and results of NKTR-102 Phase 3 planning and Bayer’s Amikacin Inhale program.
- Available financing or restructuring plans for the $215.0 million notes due September 2012, and whether the stated 12-month liquidity outlook remains adequate as spending rises.
- Actual partner milestones, royalties and product demand versus contingent amounts and management expectations.
- Whether increased R&D spending and clinical execution affect cash use, dilution or the need to reduce programs.
- Potential supply, manufacturing, regulatory, intellectual-property or indemnification developments that could delay programs or create material costs.