NEKTAR THERAPEUTICS quarterly report, Q2 FY2023

Business context and reporting period

Nektar Therapeutics is a clinical-stage biopharmaceutical company focused on immunotherapy and polymer-conjugate technologies. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; financial amounts below are in U.S. dollars. Its principal clinical programs include rezpegaldesleukin for autoimmune diseases and NKTR-255 for cancer.

Financial results and liquidity

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$20.5 million	$21.6 million	$42.1 million	$46.4 million
Net loss	$51.1 million	$159.1 million	$188.1 million	$249.5 million
Net loss per share	$0.27	$0.85	$0.99	$1.34
Cash used in operating activities	Not provided for quarter	Not provided for quarter	$103.4 million	$163.4 million

Q2 revenue fell 5% year over year; first-half revenue fell 9%. Non-cash royalty revenue was $15.8 million in Q2 and $32.7 million for the first half. Product sales were $4.7 million and $9.4 million, respectively.
Product gross margin was negative: cost of goods sold exceeded product sales by $2.3 million in Q2 and $4.7 million in the first half. The company expects a larger negative gross margin for full-year 2023, citing a below-cost fixed-price manufacturing arrangement and lower allocation of manufacturing costs to R&D.
At June 30, cash and cash equivalents were $50.7 million and short-term investments were $358.7 million, totaling $409.4 million, versus $505.0 million at December 31, 2022. Management estimated these resources would fund current plans for at least 12 months from the filing date.
Six-month operating cash use improved from $163.4 million to $103.4 million year over year. Investing activities provided $65.8 million, mainly reflecting investment maturities net of purchases; financing cash flows were immaterial.
At June 30, total liabilities were $297.3 million, including $135.7 million of liabilities from sales of future royalties and operating lease liabilities of $124.8 million. The filing reports no credit facility or other committed capital source.
Total assets were $494.3 million and stockholders’ equity was $197.0 million. Goodwill was written down to zero following a $76.5 million impairment charge in Q1.

Material changes versus the prior comparable period

Net loss narrowed year over year, primarily alongside substantially lower R&D and restructuring costs than in 2022. Q2 operating expenses were $71.1 million versus $174.4 million; first-half expenses were $227.4 million versus $315.8 million. The 2023 first-half total included the $76.5 million goodwill impairment.
R&D expense declined 31% in Q2 and 60% in the first half, reflecting prior workforce reductions, lower overhead and the change in presentation of bempegaldesleukin wind-down costs. G&A expense also declined.
Restructuring, impairment and terminated-program costs were $16.6 million in Q2 and $37.7 million in the first half of 2023, versus $106.0 million and $107.5 million, respectively, in 2022. 2023 charges included facility and equipment impairments and severance.
First-half 2022 results included a $33.4 million gain from remeasurement of the SFJ development derivative liability; no comparable gain occurred in 2023. Higher interest income partly offset non-cash royalty-sale interest expense in 2023.

Outlook, management commentary and risks

Nektar regained full rights to rezpegaldesleukin after Lilly terminated their collaboration; Nektar now bears development costs. Lilly’s Phase 2 lupus study missed its primary endpoint, and Lilly did not plan to advance the program to Phase 3. Nektar planned to initiate a Phase 2b atopic dermatitis study in 2023 and explore other autoimmune indications.
After quarter-end, on August 7, Nektar disclosed that Lilly had incorrectly calculated previously reported efficacy data from Phase 1b atopic dermatitis and psoriasis studies. Nektar reported corrected atopic dermatitis results at the 24 μg/kg dose: 83% mean EASI improvement versus placebo (p=0.002) and a 41% EASI-75 response rate. Investors should distinguish these corrected data from earlier reports and note that they are not evidence of later-stage efficacy.
Nektar continues clinical development of NKTR-255 across oncology settings. It also targeted IND readiness for a TNFR2 agonist antibody by year-end 2023, with a first clinical study planned for 2024; these are stated plans, not guaranteed outcomes.
Management expected R&D, G&A and operating cash use to decrease in 2023 following workforce reductions. No specific full-year revenue or earnings guidance was provided. Management cautioned that clinical costs, outcomes, collaboration activity and cash receipts are uncertain.
The 2023 restructuring plan reduced the San Francisco workforce by approximately 60%, substantially completed by June. Nektar is seeking to sublease excess office and laboratory space; weaker office and life-sciences sublease markets could lead to further impairment charges or lower-than-expected cash receipts.
Key risks include clinical failure or delay, reliance on third-party manufacturers and trial operators, single-source materials, limited access to future financing, and dependence on collaborations. Nektar noted it had no committed credit facility and could require additional financing or further cost reductions.
On August 7, 2023, Nektar filed suit against Lilly alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The filing states that no litigation liability was recorded at June 30. A separate Delaware stockholder action was dismissed with prejudice in July.
Nektar received a Nasdaq notice in May for failing to maintain a $1.00 minimum bid price for 30 consecutive business days. The initial compliance deadline was November 22, 2023; failure to regain compliance could put the listing at risk.

Most important facts for investors to verify

Whether cash and investments, after operating cash burn and self-funded clinical development, remain sufficient for the stated business plans and any obligations.
Progress, enrollment, safety and efficacy in the planned rezpegaldesleukin atopic dermatitis study and ongoing NKTR-255 trials; verify updates against the corrected Lilly data.
Whether restructuring produces sustainable expense reductions without impairing the ability to develop the pipeline, and whether further facility impairments or restructuring costs arise.
Developments in the Lilly dispute, the transfer of any necessary rezpegaldesleukin materials, and the potential for new collaboration or financing arrangements.
Progress in subleasing excess facilities, the status of Nasdaq listing compliance, and any material change in cash runway or royalty-sale liabilities.