Nektar Therapeutics — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; dollar amounts below are in millions unless stated otherwise. Nektar is a research-based biopharmaceutical company whose revenue is primarily generated through collaborations, royalties, and product supply.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $30.0 | $29.2 | $129.5 | $80.8 |
| Operating loss | $103.1 | $98.7 | $314.4 | $330.4 |
| Net loss | $108.6 | $98.6 | $327.2 | $328.5 |
| Basic and diluted loss per share | $0.61 | $0.56 | $1.84 | $1.88 |
| Research and development expense | $100.5 | $99.0 | $306.0 | $324.2 |
| General and administrative expense | $27.0 | $24.0 | $77.5 | $71.6 |
- Revenue drivers: Nine-month license, collaboration and other revenue rose to $55.4 million from $9.9 million, primarily reflecting two $25 million BMS milestones. Product sales were $14.6 million for the nine months; royalty revenue was $31.4 million, plus $28.0 million of non-cash royalty revenue related to previously sold royalty rights.
- Margins: Product gross margin was 2% in Q3 versus 11% a year earlier and negative 4% for the nine months versus negative 8%. Nektar attributed negative product economics to a fixed-price manufacturing arrangement with a partner; related royalty revenue exceeded the negative gross profit.
- Cash flow: Operating cash used was $214.7 million for the nine months, compared with $203.5 million in 2019. Investing activities provided $403.5 million, including net investment maturities and sales; financing activities used $229.3 million, mainly due to repayment of the notes.
- Liquidity and debt: Cash, cash equivalents and marketable investments totaled $1.154 billion at September 30, down from $1.604 billion at year-end 2019. Total liabilities were $337.7 million and stockholders’ equity was $1.171 billion. Nektar repaid its $250 million senior secured notes, plus $4.8 million accrued interest, on April 13, 2020; no principal remained outstanding at quarter-end. The balance sheet included a $66.4 million liability related to the sale of future royalties.
Material changes and unusual items
- Nine-month revenue increased 60%, chiefly due to the $50 million in BMS milestones recognized in 2020. Q3 revenue increased 3% year over year, while Q3 net loss widened by $10.0 million.
- Nine-month R&D expense decreased 6%, reflecting lower NKTR-181 pre-commercial manufacturing and NKTR-358 costs, partly offset by increased clinical trial spending on other programs. BMS reimbursements reduced R&D expense by $93.8 million for the nine months.
- Nektar recorded $45.2 million of impairment and other costs related to terminating the NKTR-181 program, including a $19.7 million write-off of manufacturer advances and $25.5 million of other costs. Following an FDA advisory committee’s negative recommendation, Nektar withdrew the NDA and ended investment in the program; the wind-down was substantially complete by September 30.
- Interest expense on the senior notes declined after repayment. Non-cash interest expense on the royalty-sale liability increased to $22.1 million for the nine months, as Nektar raised its estimated effective annual rate to 20.2% (48% prospective rate) based primarily on higher forecast CIMZIA sales.
Outlook, commentary and risks
- Management said existing liquidity was expected to fund current business plans for at least the next 12 months. Nektar has no credit facility or other committed capital source and expects continued substantial losses and negative operating cash flow.
- For 2020, management expected product sales to be lower than 2019, product gross margin to remain negative, R&D expense to be generally consistent with 2019, G&A expense to increase, and interest and other income to decline significantly. Excluding 2019 NKTR-181 pre-commercial costs, management expected R&D to increase marginally.
- Bempegaldesleukin is a central value and funding driver. Nektar reported ongoing BMS-partnered registrational trials and other studies; BMS had extended first-line melanoma data-readout estimates by approximately six months. The company cited up to $1.455 billion in BMS development, regulatory and launch milestones, of which $50 million had been received.
- COVID-19 had delayed some trials and could further affect enrollment, site initiation, manufacturing, trial timelines and costs. Management said the ultimate effects were uncertain. Lilly’s NKTR-358 studies were expected to face delays of at least three to six months; Nektar also reported slower NKTR-255 enrollment.
- Other key risks include clinical or regulatory failure, reliance on collaboration partners and milestone payments, competition, manufacturing and single-source supply risks, and the need for future financing if cash needs exceed available resources. Securities class actions and derivative suits remained pending; potential losses were not estimable and no liability was recorded.
Important facts for investors to verify
- Progress, trial data, regulatory timing and milestone eligibility for bempegaldesleukin, including the impact of COVID-19 and BMS’s revised timelines.
- Cash burn, investment liquidity and whether the stated 12-month funding outlook remains adequate as development spending continues.
- Revenue quality and variability: the extent to which future results depend on collaboration milestones, royalties and partner product sales.
- Future product margins and the economics of the fixed-price manufacturing arrangement; also any changes to forecast-dependent non-cash royalty interest expense.
- Developments in pending securities, derivative and intellectual-property litigation, including any resulting financial exposure.